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Munis Extend Worst Losses Since 2008 as Illinois Sets Sale

Federal Reserve Chairman Ben S. Bernanke
Munis have joined a fixed-income rout since Federal Reserve Chairman Ben S. Bernanke's comments last week that the central bank plans to slow bond-buying this year and end purchases in mid-2014 if the economy improves. Photographer: Pete Marovich/Bloomberg

The U.S. municipal market is poised for its worst monthly loss since 2008, leading investors to offer a record amount of tax-exempt debt as yields surged to 26-month highs.

The selloff is the backdrop for a $1.3 billion general-obligation sale tomorrow by Illinois, the lowest-rated U.S. state. Local-government debt has lost 5.1 percent this month, matching the drop in September 2008, when Lehman Brothers Holdings Inc. filed for bankruptcy, Bank of America Merrill Lynch data show.

Institutional bondholders such as mutual funds put about $2 billion of munis up for sale yesterday, the most since at least 1996, when data compiled by Bloomberg begins. Yields on 10-year AAA munis jumped to 2.96 percent at 4 p.m. in New York, the highest since April 2011. Climbing interest rates led analysts from Janney Montgomery Scott and Citigroup Inc. to recommend buying.

“There’s a lot of sweating right now -- the move has been violent,” said Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors, in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Mike McKee.

Bernanke’s Rout

Munis have joined a fixed-income rout since Federal Reserve Chairman Ben S. Bernanke’s comments last week that the central bank plans to slow bond-buying this year and end purchases in mid-2014 if the economy improves.

In a sign of the market’s retreat, the $3.4 billion iShares S&P National AMT-Free Municipal Bond Fund, known as MUB, has dropped about 5 percent this month, the most since its debut in 2007. The biggest exchange-traded fund tracking the $3.7 trillion market rose 1.5 percent today to $102.82.

Investors have pulled $5.3 billion from municipal-bond mutual funds in the past three weeks, the biggest wave of withdrawals since February 2011, Lipper US Fund Flows data show.

Georgia canceled a $157 million general-obligation sale today, joining issuers from New Jersey to Minnesota that have postponed borrowings set for this week.

“The run-up in rates over the past couple of weeks moved it well out of our commission-approved policy for savings,” said Lee McElhannon, director of bond finance at the Georgia State Financing & Investment Commission. “We don’t see it coming back to us in the near future.”

About 60 negotiated sales this week totaling $2.6 billion are also considered day-to-day, meaning underwriters may wait to offer the debt until interest rates stabilize or decline.

Illinois Sale

In the Illinois sale, investors may ask for 1.75 percentage points more than AAA munis to buy debt maturing in 20 years, said Dan Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $19.5 billion of local debt. He cited price discussions from yesterday.

The state plans to proceed with the offer even with the latest volatility.

“The long-term dividends that these projects will pay in shorter commutes and greater state-wide competitiveness more than offset any cost the bond market may demand,” Abdon Pallasch, the state’s assistant budget director, said in a statement. Illinois has the fourth-lowest investment grade from all three rating companies.

Best Opportunity

The higher interest rates offer the best opportunity to buy munis since 2011, Alan Schankel, head of fixed-income research at Janney in Philadelphia, said in a report today.

George Friedlander and Vikram Rai, strategists at Citigroup, recommended buying 10- and 30-year local debt, citing “key support levels” and improving tax collections.

“The sharp rebound in yields reflects significant erosion in the value of existing long-term bonds,” Friedlander said in a research note today. “The current environment represents an important opportunity for individual investors to begin rebuilding the income-generating capacity of their muni portfolios.”

The interest rate on benchmark 10-year munis compares with about 2.61 percent for similar-maturity Treasuries.

The ratio of the yields, a gauge of relative value, is about 113 percent, the highest since August. The greater the figure, the cheaper munis are compared with federal securities

Download: Fabian Says `Trading Slows in Muni Market'


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