Muni Rally Approaches Limit With 47-Year Low Yields, Fabian Says
The rally in the $3.7 trillion local- debt market that has driven yields to the lowest in more than four decades has probably run its course, said Municipal Market Advisors’ Matt Fabian.
Since the U.S. presidential election Nov. 6, the yield on benchmark 30-year munis has fallen about 0.36 percentage point to 2.49 percent as of noon in New York, a record low for a Bloomberg Valuation index that began in January 2009. The tax- exempt debt is the most expensive in five years relative to Treasuries.
“It’s possible we could continue to rally, but that idea is becoming much less believable,” said Fabian, a managing director at Concord, Massachusetts-based MMA. “Allocating capital in this market looks increasingly risky.”
A Bond Buyer index of 20-year general obligations fell to the lowest since 1965 last week. Munis returned 1.8 percent in November, the biggest monthly gain since January, according to Bank of America Merrill Lynch indexes.
Local debt has earned 9 percent this year, after returning about 11 percent in 2011, the data show. It’s poised to be the biggest two-year rally since 2001. Treasuries have returned 2.6 percent this year.
The rally in local debt accelerated in the past month as investors bet lawmakers will raise taxes as part of reducing the nation’s deficit. President Barack Obama wants to increase the top federal income-tax rate to 39.6 percent from 35 percent, increasing the appeal of tax-free debt.
“It gets exponentially harder for munis to continue to rally as yields fall,” Fabian said. “That we have broken through these levels is remarkable.”
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