Munis Gain a Fourth Week as Yields Stay Higher Than Treasuries
Tax-exempt bonds gained for a fourth straight week, the longest stretch since May, as yields remained higher than U.S. Treasuries and as investors saw the bankruptcy of Jefferson County, Alabama, as an isolated event.
Top-rated 10-year tax-exempt debt yielded 2.24 percent yesterday, down 11 basis points from the end of last week and 33 points since Oct. 14, according to data compiled by Bloomberg. A basis point is 0.01 percentage point. The market is closed today for Veteran’s Day.
Ten-year munis yielded about 109 percent that of comparable-maturity Treasuries, down from 115 percent Nov. 4 as U.S. debt yields rose from last week. The ratio has exceeded 100 percent on all but one day since Aug. 29, the longest streak since 2009. That provides investors in the $2.9 trillion municipal market with relatively higher returns.
“Low Treasury yields make everything else more attractive,” said Matt Fabian, a managing director with Municipal Market Advisors, a Concord, Massachusetts-based research firm.
Alabama’s most-populous county filed the largest-ever U.S. municipal bankruptcy Nov. 9 after state lawmakers and creditors led by JPMorgan Chase & Co. (JPM) failed to reach an agreement to refinance $3.14 billion of sewer-system bonds. Bankruptcy had been an option since the derivative-laden debt unraveled in the 2008 collapse of the subprime-mortgage market.
“The market has been more or less prepared for it,” said Rob Novembre, managing director of Arbor Research & Trading Inc., a broker in New York. “It’s been a slow-motion train wreck for the last three years.”
The iShares S&P National AMT-Free Bond Fund, an exchange- traded fund that tracks the Standard & Poor’s Municipal Bond Index, rose 15 cents yesterday to $106.12.
Municipal bankruptcies involving Central Falls, Rhode Island, in August and Harrisburg, Pennsylvania, last month haven’t prompted a flight from the local-government bond market. Yields have dropped to levels unseen since the 1960s, with top- rated 10-years dipping below 2 percent in September.
Investors added about $761 million to U.S. municipal-bond mutual funds in the week through Nov. 9, the fifth straight week of inflows, Lipper US Fund Flows said yesterday.
Returns on municipals including interest exceeded Treasuries this year through yesterday at 8.9 percent versus 8.6 percent, according to Merrill Lynch Bank of America indexes. They’ve also beaten the 0.33 percent total return for the S&P 500 equity index through yesterday, according to data compiled by Bloomberg.
Jefferson County is “an isolated case,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. The impact will be “negligible,” he said.
The filing won’t affect debt directly tied to Jefferson County itself, John Mousseau, portfolio manager at Vineland, New Jersey-based Cumberland Advisors, which oversees $1.1 billion in municipal securities, wrote in a note to clients.
Investors may be reluctant to buy from borrowers using derivatives because the Jefferson bankruptcy was linked to interest-rate swaps, which backfired when they were used in an attempt to lower the county’s cost of financing a sewer project, said John Donaldson, who oversees about $600 million of municipal assets for Haverford Trust in Radnor, Pennsylvania.
“If anybody opens a new official statement and reads disclosure on derivatives that doesn’t read well, I think it will have an impact on somebody trying to come to market who’s got derivative exposure,” Donaldson said.
The bankruptcy shouldn’t reignite concerns that gripped the market after bank analyst Meredith Whitney’s prediction last year of “hundreds of billions of dollars” of municipal defaults, said Justin Hoogendoorn, managing director in the strategic analytic group at BMO Capital Markets in Chicago
“The market understands that it’s not systemic,” he said. “It’s a headline, so it could chase a little bit of retail money out of the sector. Beyond that, I don’t think it’s too big of a problem for the market to absorb.”
Whitney’s predictions haven’t materialized. Through September, there were 42 municipal defaults totaling $949 million, compared with 79 in the first nine months of 2010, amounting to about $2.89 billion, according to the Distressed Debt Securities Newsletter, published by Miami Lakes, Florida- based Income Securities Advisors Inc.
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