Wall Street Holdings Leanest Since ’04 at ’65 Rates: Muni Credit
Wall Street securities firms may have unloaded their municipal-debt holdings at exactly the right time.
With yields approaching the lowest since the 1960s, brokers and dealers cut their inventory of U.S. local bonds to $29 billion in the three months through September, the least since the first quarter of 2004, according to Federal Reserve data released Dec. 6.
The pullback may have shielded them from the $3.7 trillion muni market’s biggest losses since 2010. After a six-month rally that pushed yields to 47-year lows, demand for the securities has faltered. Investors betting lawmakers will curb munis’ tax- exempt status are looking to unload more than $1 billion of the debt, the most in two years, data compiled by Bloomberg show.
“A lot of people are trying to get out of a very small door here and it’s kind of ugly,” said David Manges, muni trading manager at BNY Mellon Capital Market LLC in Pittsburgh.
The thinned inventory for brokers and dealers, the market’s middlemen, threatens to heighten volatility amid the market’s losses and cost local issuers money, said Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors, and Peter Hayes, head of muni debt at New-York based BlackRock Inc.
“Liquidity this time of year is always a bit challenged, everybody pulls back risk, pulls back their balance sheet,” said Hayes, whose firm oversees about $105 billion of local bonds.
Munis have lost 1.5 percent in December, on pace for the steepest monthly loss since the end of 2010, Bank of America Merrill Lynch data show. That was when banking analyst Meredith Whitney incorrectly predicted in an interview on CBS Corp.’s “60 Minutes” that local defaults were set to reach “hundreds of billions of dollars” in the following year.
“That started the adjustment along with this risk-on rally and the year-end liquidity issues,” Hayes said.
Losses gained momentum as speculation mounted that President Barack Obama and congressional leaders were getting closer to a deal to avoid more than $600 billion of spending cuts and tax increases set to start in January. Bets on a potential agreement are pushing investors to buy stocks rather than bonds, Hayes said.
The Standard & Poor’s 500 Index has risen 2.2 percent this month.
Obama has proposed limiting the value of the muni-bond tax break for higher earners to 28 percent. At the same time, he wants to make top earners pay higher taxes on ordinary income, capital gains and dividends.
Munis have fallen faster than Treasuries this month.
Yields on AAA munis due in 10 years reached 1.75 percent yesterday, the highest since September, data compiled by Bloomberg show. The interest rate is about 96 percent of the 1.82 percent yield on benchmark 10-year Treasuries. That ratio is up from 85 percent last week, showing munis have cheapened relative to federal debt.
Institutional bondholders such as mutual funds put $1.2 billion of munis up for sale Dec. 17, close to a two-year high of $1.4 billion last week, Bloomberg data show.
While dealers typically hold back on buying munis toward year-end, the selling wave in advance of possible tax changes has forced yields higher than expected, BNY Mellon’s Manges said.
“If you have less aggressive brokers and dealers, then in theory issuers are paying higher prices to access the market, and buy-and-hold investors are getting better income,” said Fabian at MMA.
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