Munis’ History of April Gains at Risk Amid Most Sales Since 2003

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Surging issuance is threatening to spoil the $3.6 trillion municipal market’s eight-year streak of April gains, the strongest performance of any month.

Debt of U.S. cities and states has lost 0.4 percent through April 29, on pace for the first loss in the month since 2006, Bank of America Merrill Lynch data show. Yields on benchmark 10-year munis have climbed to the highest since mid-March.

Buyers’ appetite for munis faltered as the pace of bond offerings climbed. Spurred by interest rates hovering above five-decade lows, localities are on pace this year to issue the most debt since at least 2003. The rush is derailing munis’ pattern of staging an April rebound after tax-related selling in March.

“By historical standards, this was a very, very heavy April,” said Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets in New York. “It’s just a simple supply-demand issue.”

Led by issuers including California and a Texas tollway agency, April deals have tallied $36 billion, up 65 percent from a year earlier, Bank of America data show.

At the same time, individuals, the biggest owners of local-government debt, have been selling. They yanked $820 million from muni mutual funds in the three weeks through the April 15 tax-filing deadline, according to Lipper US Fund Flows. It was the longest stretch of withdrawals since January 2014.

History Defied

Yields are set to rise in April for the first time since at least 2008.

Benchmark 10-year munis yield 2.09 percent, up about 0.1 percentage point this month. The increase is a switch from the past five years, when yields on the maturity fell by an average of 0.22 percentage point in April, according to data compiled by Bloomberg.

The higher yields may already be deterring borrowers. States and cities plan $5.9 billion of long-term bond sales this week, down from last week’s $9.5 billion, Bloomberg data show.

With April’s losses, munis are also starting to look cheap relative to Treasuries, said Alan Schankel, a managing director of fixed-income strategy at Janney Capital Markets in Philadelphia.

Yields on 10-year munis have exceeded those on similar-maturity Treasuries for about a month. The ratio of the yields, at about 103 percent, compares with a one-year average of 96 percent. Historically, the figure has been under 100 percent as investors accept lower interest rates in exchange for munis’ tax-exempt income.

“Our ratios are a little bit higher than we expect them to end up” by August, said Phil Fischer, head of muni research at Bank of America in New York. “That should increase demand.”

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