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Barclays Sees Munis Extending Best Rally as Citigroup Says Sell

The biggest municipal-bond rally in five years, which dropped yields to near the lowest since June, has Barclays Plc and Citigroup Inc. differing on which direction the $3.7 trillion market will move next.

Conditions “remain favorable for the muni market, as muni demand shows signs of recovering and supply is manageable,” Tom Weyl, director of muni research for Barclays in New York, said today in a report. That follows a note yesterday from Citigroup’s Mikhail Foux and Vikram Rai that said it’s “time to take profits” because muni returns are “likely to be much less impressive” in 2014.

State and local debt has returned 4.5 percent this year through yesterday, the strongest start since gaining 4.9 percent in 2009, Bank of America Merill Lynch data show. The market has defied predictions of a second-straight year of losses by outpacing U.S. Treasuries and corporate bonds, which have advanced 2.3 percent and 3.9 percent, respectively.

Individuals added about $274 million to muni mutual funds in the week through April 9, the most since the period through Feb. 19, Lipper US Fund Flows data show. At the same time, issuance shows no sign of picking up after the slowest quarter since 2011. States and cities are scheduled to issue $4.9 billion of debt over the next 30 days, the smallest slate since March 21, data compiled by Bloomberg show.

Benchmark 10-year munis yield 2.48 percent, close to the lowest since June, Bloomberg data show. Foux and Rai said investors should allocate more money to cash on bets that interest rates will rise.

The median forecast in a Bloomberg survey of 55 analysts is that 10-year Treasury yields will be about 1 percentage point higher at this time next year.

“The first quarter of 2014 turned out to be surprisingly good for tax-exempts,” wrote Foux and Rai, who are based in New York. “At current levels tax-exempts do not have much upside, and rates are expected to start moving higher.”

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