Local Debt’s Win Over Treasuries Longest Since ’06: Muni Credit
The $3.7 trillion U.S. municipal- bond market is set to beat Treasuries for the longest monthly stretch in six years as investors turn to tax-exempts for their relative safety.
Securities sold by states and localities have earned 0.3 percent this month, compared with a 0.5 percent loss on federal borrowings, Bank of America Merrill Lynch data show. It would be the fifth straight month for muni returns to exceed those on Treasuries, the best performance since 2006.
Bill Gross, who oversees the world’s biggest bond fund, is among investors favoring munis as they are poised to out-earn Treasuries this year on an absolute basis and also when adjusted for volatility. Local-debt mutual funds have added assets for 28 straight weeks, the lengthiest span since March 2010, according to Lipper US Fund Flows data show.
“It’s been an extraordinary run,” John Hallacy, head of muni research at Bank of America Merrill Lynch in New York, said in a telephone interview. “People are just seeking a safe harbor.”
Local debt has returned 3.9 percent in 2012 after accounting for price swings, compared with 0.6 percent for Treasuries, data compiled by Bank of America and Bloomberg show. It would be the first time since 2006 that tax-exempts have bested Treasuries in consecutive years on a volatility-adjusted basis.
Without accounting for volatility, munis have earned 7 percent this year, to 1.7 percent for Treasuries. Munis have been the better bet as defaults are on pace to be the lowest since at least 2009, according to data from Concord, Massachusetts-based Municipal Market Advisors. The drop refutes banking analyst Meredith Whitney’s projection in December 2010 of “hundreds of billions of dollars” of defaults within a year.
Gross, 68, directed 5 percent of the $278 billion Total Return Fund to munis in September. It’s the first time he’s held that much local debt in back-to-back months since at least 2006, according to data from his firm, Pacific Investment Management Co., in Newport Beach, California. At the same time, he reduced Treasuries to 20 percent, the least since October 2011.
The Federal Reserve’s move to keep its benchmark overnight rate close to zero to spur the economy has helped drive yields to generational lows. Interest rates on munis due in 20 years were 3.68 percent last week, near a 45-year low of 3.6 percent set Jan. 19, according to a Bond Buyer index.
The demand has benefited lower-rated cities and localities. Investors demanded as little as 1.66 percentage points of additional yield on Oct. 2 to buy munis due in 30 years and rated BBB, Standard & Poor’s second-lowest investment-grade rating, Bloomberg data show. That yield spread above AAA bonds was the narrowest since October 2008.
The biggest percentage in almost two decades has been to retire higher-cost debt, giving investors fewer new bonds to bid on. Securities for refunding account for 42 percent of issuance this year as of Oct. 17, JPMorgan Securities LLC analysts led by Peter DeGroot said in an Oct. 19 report. It’s the most for refinancing since 1993, according to the report.
Muni investments are also benefiting from an improving fiscal outlook following the 18-month recession that ended in June 2009.
State tax collections rose 3.2 percent in the second quarter compared with the same period in 2011, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. It’s the 10th straight quarterly increase.
In an Oct. 29 trading session that was abbreviated because of Hurricane Sandy, yields on benchmark 10-year tax-exempts were little changed at about 1.7 percent, data compiled by Bloomberg show. Treasuries of similar maturity yielded about 1.72 percent at about 12:30 p.m. New York time that day. Bond markets were shut in the U.S. yesterday because of the storm.
Munis have ended with yields below their federal counterparts since Oct. 4. Investors look at the ratio to gauge relative value between the two asset classes. The lower it is, the more expensive munis are compared with Treasuries.
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