April Best for Borrowing Shows T.S. Eliot Was Wrong: Muni Credit
T.S. Eliot, the Nobel Prize-winning poet, St. Louis native and former Lloyds Bank clerk, didn’t know much about American cities because April isn’t the cruelest month.
Eliot described the fourth month of the year as the most cruel in his 1922 narrative poem “The Waste Land.” Yet it’s the most rewarding for investors in the $3.7 trillion municipal market. Since 2009, yields on benchmark 10-year debt have fallen more in April than any other month, data compiled by Bloomberg show.
Bondholders tend to receive the most cash from maturing debt and coupon payments in June, July and August, and they start planning how to invest that money in April, said John Hallacy, head of muni research in New York at Bank of America Merrill Lynch. Once investors know their April 15 tax bill, they are able to put money to work, he said.
“It’s just a seasonally strong month for a lot of technical reasons,” Hallacy said. “You start to get into heavier roll-over months, so there’s the notion that if you have something coming due, it’s time to take a look and consider what else to go into.”
Adding fuel to a potential April rally, buyers may have less muni debt to choose from. Issuers from Oregon to Pennsylvania have scheduled $6.7 billion of long-term borrowing in the next 30 days, down from a three-month high of $13.3 billion on Feb. 27, according to Bloomberg data. The five-year average is $10.3 billion.
The muni market has lost 0.7 percent this month as of March 26, while Treasuries are down less than 0.1 percent, according to Bank of America Merrill Lynch data. This would be the fifth straight March in which munis have lost value as investors sell tax-exempt debt or avoid buying the securities to make tax payments. In contrast, April has shown gains in each of the past six years.
Yields on 10-year benchmark munis have fallen in April by 9 percent on average in the past five years, the biggest monthly drop in yields. Prices move in the opposite direction of interest rates.
Investors will receive about $91 billion combined in June and July from maturing bonds and coupon payments, the highest monthly amounts in 2013, according to Bank of America. That’s up from about $37 billion combined in March and April.
Investors also have bonuses or other first-quarter payments they need to deploy, Hallacy said.
“The tone gets better” in April, Hallacy said. “People get quarterly cash and think about where else they’re going to find a home for it.”
Eliot, born in 1888, wrote “The Waste Land” while working at Lloyds Bank, now Lloyds Banking Group Plc, according to Ed Petter, a spokesman for the London-based company. He joined the bank in 1917 and left in 1925, according to Petter. Eliot received the Nobel Prize in Literature in 1948 and died in 1965.
“April is the cruellest month, breeding/Lilacs out of the dead land, mixing/Memory and desire, stirring/Dull roots with spring rain,” he wrote in the poem’s opening stanza.
Eliot’s view of April may yet resonate with investors this year. U.S. muni mutual funds have lost assets for three straight weeks, the longest stretch since December, Lipper US Fund Flows data show. Chris Mauro, head muni strategist at RBC Capital Markets LLC in New York, said the timing suggests the withdrawals may persist.
During the past 10 years, investors on average have pulled cash from the funds in the second week of April, after adding money each week in March, Mauro wrote in a March 25 report.
“Muni fund flows generally have returned to positive territory” after April 15, he wrote. “Given the early March outflows this year, we question whether we will see this snapback pattern in 2013.”
While seasonal patterns in Treasuries may also bolster munis in the next month, that support may be weaker than in previous years, said Craig Brothers, managing director of Bel Air Investment Advisors LLC in Los Angeles.
Yields on Treasuries tend to drop at this time of year as investors switch from equities, said Brothers, who helps manage $3 billion of munis. On average in the past five years, interest rates on 10-year Treasuries are typically little changed in April and decline starting in May, according to Bloomberg data.
Munis aren’t as cheap relative to Treasuries coming out of March as they were in previous years, according to Brothers.
At 3.22 percent, yields on benchmark 30-year munis are close to the highest since May, Bloomberg Valuation data show. That compares with about 3.09 percent on federal debt. The ratio of the two, at about 104 percent, is the highest since September. Yet it’s still below the five-year average of about 112 percent.
Following is a pending sale:
PENNSYLVANIA plans to sell $950 million of tax-exempt general obligations as soon as April 2, according to Bloomberg data. Proceeds will help finance redevelopment, road and bridge repair, and water and sewer upgrades, according to bond documents. (Added March 28)
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