BlackRock Buys High-Grade at Yield’s Tipping Point: Muni Credit
BlackRock Inc. (BLK), the world’s largest asset manager, is selling some of its riskiest municipal bonds in favor of safer local debt as $1.2 trillion of potential federal spending cuts and tax increases loom.
Debt of the least fiscally sound issuers is rallying the most since 2009, buoyed by the biggest wave of cash in at least two years flowing into high-yield muni mutual funds. Local bonds rated below investment grade have earned 15 percent this year, compared with 6.9 percent for the rest of the $3.7 trillion muni market, Standard & Poor’s indexes show.
BlackRock is reducing holdings of speculative-grade munis and buying those rated A and as high as AA, third-best, as the U.S. faces a so-called fiscal cliff of tax boosts and spending reductions starting in January unless Congress acts. Laurence D. Fink, chief executive of the New York-based money manager, said yesterday on Bloomberg Television that the U.S. economy may go into recession next quarter as companies curb hiring.
“There’s an ample amount of liquidity in the high-yield market right now -- everyone wants it,” said Sean Carney, a muni strategist in Princeton, New Jersey, at BlackRock, which oversees $106 billion of local debt. “No one’s ever going to fault you for going up in credit quality in their portfolios going into a time of uncertainty.”
The riskiest state and local governments have gained the most from the Federal Reserve policy of keeping its key lending rate near zero through at least mid-2015, which has boosted demand for higher-yielding assets. Investors accepting weaker credit quality in search of more yield have helped drive borrowing costs to generational lows for municipalities recovering from the 18-month recession that ended in 2009.
The extra yield on munis rated BBB, the second-lowest investment grade, relative to AAAs narrowed to 1.1 percentage points on Aug. 28, the smallest since 2008, data compiled by Bloomberg show. The spread was 1.15 percentage points yesterday.
The rally “is running out of steam,” said Peter Hayes, BlackRock’s head of muni debt. “You have to be a little bit early to take advantage of good liquidity, because when things turn bad, it dries up pretty quickly.”
BlackRock, which manages assets totaling $3.6 trillion, has been selling debt from issuers such as Puerto Rico, which S&P rates BBB, Hayes said. Bonds rated A are the “sweet spot,” he said.
The company’s National Municipal Fund (MANLX), its biggest local- debt fund by assets, has returned 9.5 percent this year, beating 78 percent of its peers, data compiled by Bloomberg show.
An agreement last year between President Barack Obama and congressional leaders to raise the debt limit also included $1.2 trillion of automatic spending cuts to take effect from fiscal year 2013 through fiscal year 2021. The reductions were designed to force Congress to come up with another plan, which it hasn’t done.
Michigan, with a AA- rating, S&P’s fourth-highest, is planning for the potential loss of as much as $300 million a year in federal funding. The decline would affect programs such as workforce development, Governor Rick Snyder said in an interview last week at Bloomberg’s New York headquarters.
“If we do see some type of attempts to cut the deficit, there are probably pockets of the market that get affected,” Hayes said. “It’s not going to have this widespread impact where you see muni credit deteriorate from top to bottom.”
Investors have added $8.8 billion to high-yield muni funds in 2012, Lipper US Fund Flows data show. Yields on 10-year general-obligation bonds with an A+ rating touched 2.71 percent this month, the lowest since at least 1994, according to data compiled by Bloomberg.
Morgan Stanley Smith Barney joins BlackRock in preferring higher-quality bonds. John Dillon, the company’s chief muni strategist in Purchase, New York, wrote a report last month saying he favors general-obligation and essential-service securities with at least a single-A rating.
“We’re trying to resist the urge to reach too far for yield,” Dillon said in an interview. “We’re not adding to positions” in BBBs, in part because “the fiscal cliff is clearly a negative,” he said.
In the broader tax-exempt market, yields on benchmark 10- year munis fell about 0.01 percentage point to 1.65 percent yesterday, a Bloomberg index shows. It’s the lowest since July 27, when the index dropped to 1.63 percent, the lowest since it began in January 2009.
Following is a pending sale:
CALIFORNIA plans to sell about $550 million in general- obligation refunding bonds as soon as Oct. 23, according to the state treasurer’s website. The debt will be sold via auction. (Added Oct. 15)
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