The $3.7 trillion municipal market is set for its best April gain in three years, extending a 2014 rally that has outpaced stocks, Treasuries and corporate debt.
Muni bonds have earned 1.24 percent in April, the most since 2011, Bank of America Merrill Lynch data show. That extends a streak of April that dates back seven years. The first quarter was the strongest start to a year since 2009.
The rally caused investors and analysts from Citigroup Inc., Vanguard Group Inc. and Morgan Stanley Wealth Management to question its sustainability as benchmark yields hit 10-month lows. Others expect the tax-exempt interest will entice people who faced higher rates April 15.
“For an individual investor, it makes all the sense in the world to still own municipals, even though a lot of that cheapness came out,” said Roberto Roffo, who helps oversee $1.8 billion of state and local debt at Monument, Colorado-based Advisors Asset Management Inc. “There’s nothing out there that compares, especially on an after-tax basis.”
Municipal bonds have outpaced other assets through the first four months of the year, returning 5.1 percent, according to Bank of America data. By comparison, the Standard & Poor’s 500 Index of stocks increased 1.8 percent, Treasuries gained about 2 percent and company securities advanced 3.9 percent.
The lack of state and city bond offerings buoyed the gains. They’ve issued about $80 billion through April 25, the least since 2011 and down from $113 billion at the same time last year, data compiled by Bloomberg show.
Benchmark 10-year munis yield 2.38 percent, close to the lowest since June and less than the 2.66 percent rate on similar-maturity Treasuries, Bloomberg data show.
While the ratio of the yields is near the lowest since January 2013, it doesn’t account for the tax exemption for municipal debt. For individuals in the highest federal income-tax bracket, the AAA tax-free rate is equivalent to 3.94 percent for taxable securities.
On April 15, some top earners faced taxes on debt interest payments as much as 24 percent higher than in 2012.