Buying Opportunity Seen as History Shows March Loss: Muni Credit
Yields in the $3.7 trillion U.S. municipal-bond market are the highest in six months and may rise further in March -- as they have in 14 of the last 20 years, according to data compiled by Bloomberg.
Investors next month will be looking to dispose of munis to raise cash for tax payments before the April 15 deadline even as states and localities boost bond sales to $8.7 billion over the next month, Bloomberg data show. That’s 21 percent above their three-month average.
March selling may push tax-free yields up by as much as 0.15 percentage point, said Michael Pietronico, who manages $875 million of munis as chief executive officer of Miller Tabak Asset Management in New York. That may create a buying opportunity, he said, with Bloomberg data going back to 1993 showing there’s a 50 percent chance of interest rates falling back in April.
“March is the best month to put cash to work,” Pietronico said in a telephone interview. “You want to be throwing money at municipal bonds because yields generally move higher” before falling again “immediately after that.”
Issuers from California to Maryland are set to borrow next month as investors are looking for higher yields after interest rates on 20-year general-obligations in January fell close to their lowest levels in 47 years, according to a Bond Buyer index. Total returns for tax-exempt securities in March were negative 14 times during the past two decades, worse than U.S. Treasuries and stocks, according to Bank of America Merrill Lynch data.
Next month, bondholders may try to capture past gains on their tax-exempt holdings while some will sell tax-exempt assets and shift the proceeds into the stock market, “which has been on quite a run over the last couple of months,” said Neil Klein, who helps oversee $1.2 billion of fixed income at Carret Asset Management in New York.
While the Standard & Poor’s 500 index fell 0.6 percent to 1,502.42 (SPX) yesterday, it’s near the highest level since October 2007, Bloomberg data show.
“What we’re expecting for March is a minor rotation from bonds to cash or from bonds to equities,” Klein said. “There will be some degree of selling pressure as people look to capture gains or raise cash to pay taxes.”
The anticipated increase in muni sales will surpass the amount of payments that investors receive from principal and interest on their tax-exempt investments that they need to reinvest, Pietronico said.
“The uptick that we will get will outnumber the redemptions and coupon interest that will hit for the month,” Pietronico said.
While investors may be poised to sell, the impact may be muted by the effect of about $1.2 trillion in across-the-board budget cuts over nine years that are set to begin March 1 unless President Barack Obama and Congress reduce expenses and raise revenue.
If lawmakers are unable to craft a plan by the deadline, yields on Treasuries and tax-exempt securities would fall in anticipation that the spending cuts will slow the U.S. economy, pushing investors toward safer assets, Pietronico said. That would help moderate any anticipated selloff next month, he said.
“That could be very much a positive for U.S. Treasury prices,” Pietronico said. “So there’s a chance that if Treasuries rally if the spending cuts are enacted, that municipals can hold their ground” in March.
Municipal-bond interest rates have increased this year, along with those on U.S. Treasuries, amid signs that the economy is improving. Yields on benchmark tax-exempts maturing in 10 years rose about 0.19 percentage point in 2013 to a six-month high of 1.88 percent yesterday, Bloomberg data show.
In March, munis have lost value 14 times from 1993 to 2012, compared with 12 for Treasuries and eight for the S&P 500, Bank of America Merrill Lynch data show.
For tax-exempt debt next month, “the likelihood is that it will be a moderate loss,” Pietronico said.
Following are pending sales:
MARYLAND plans to borrow $898 million of tax-exempt debt through competitive bid as soon as March 6, according to Bloomberg data. Moody’s Investors Service rates the state AAA, its highest grade. (Added Feb. 22)
CALIFORNIA’S VENTURA COUNTY PUBLIC FINANCING AUTHORITY is set to issue $300 million of tax-exempt lease revenue bonds as soon as next week, Bloomberg data show. Proceeds will help finance a replacement wing at the Ventura County Medical Center and pay down short-term debt, according to bond documents. Standard & Poor’s rates the sale AA, third-highest. (Added Feb. 22)
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