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Municipal Market Shrinks to Smallest Since ’09 as Issuance Slows

The U.S. municipal-bond market shrank by about $10 billion last quarter as local governments borrowed less for public works, extending a slide that’s propelled the securities to their best performance since 1991.

The amount of municipal debt dropped to $3.66 trillion as of March 31, the smallest since 2009, according to quarterly data released today by the Federal Reserve.

The decline puts the market on pace to contract for a fourth straight year as states and cities still recovering from the recession that ended five years ago focus on cutting expenses rather than borrowing for new projects. The scarcity has boosted returns for munis, which individual investors typically buy for their tax-exempt income. Benchmark 10-year yields set one-year lows this month.

“Availability is down enough that even with relatively moderate demand, you’re getting this effect where munis are getting richer,” said Chris Mier, a muni strategist for Loop Capital Markets in Chicago.

Munis gained in each of the year’s first five months for the first time since 1991, according to Bank of America Merrill Lynch data. The securities have earned 6.2 percent this year, after a 2.9 percent loss in 2013. Last year marked the first annual decline since 2008.

States, cities and other public agencies have sold $106 billion of debt this year, down from $142 billion a year earlier, data compiled by Bloomberg show. The slowdown has left public agencies paying off old debt at a faster pace than they are borrowing.

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