Biggest Rally of ’13 Signaling Fifth April Rebound: Muni Credit
The $3.7 trillion municipal market is extending its biggest rally this year as the end of tax- filing season frees investors to buy into the biggest wave of state and city debt issuance since June.
Municipal bonds have returned 0.9 percent in April, on pace for the best month since November, Bank of America Merrill Lynch data show. Benchmark tax-exempt yields have fallen to the lowest since January even as localities from California to Florida are set to borrow about $21 billion between last week and this week, the busiest span in 10 months.
Local debt historically rebounds this month after individuals sell to raise cash before the April 15 tax-filing deadline. Munis have advanced in eight of the past 10 Aprils, and it would be the fifth straight year in which April gains followed March losses, Bank of America data show. Even though investors withdrew the most money this year from muni funds in the week through April 10, most of the retreat was from debt used as a cash alternative, said Chris Mauro, head of muni strategy at RBC Capital Markets LLC in New York.
“The fact that the vast majority of outflows last week were in ultra-short products is an encouraging sign for the coming weeks,” Mauro said. “The market is doing well, and it’s handling new deals.”
Local debt has joined a rally in fixed-income securities as signs of global economic weakness fuel demand for government borrowings. Yields on 10-year benchmark Treasuries touched the lowest since December this week.
With municipal interest rates below their five-decade average, states and cities are refinancing debt at lower yields. Houston is set to sell $250 million next week to retire higher- cost tax-free debt, as well as a $75 million taxable refunding.
About 60 percent of the $96 billion of securities issued this year through April 11 has been for refunding, according to Bank of America data. That approaches the pace of refinancing last year, which saw the fastest clip since 1993, according to John Hallacy, Bank of America’s head of muni research.
Such deals call higher-yielding bonds away from investors, giving them cash to redeploy.
Bondholders are poised to get even more money back in coming months, which should further fuel demand, Mauro said. They’ll receive $18 billion in April from coupon payments, maturities and calls, $26 billion in May and about $45 billion in both June and July, he said.
“The Street seems pretty fearless because we’re going into the June-July coupon period” and yields are falling, said David Frank, managing director of muni trading at CastleOak Securities LP in New York. “We’re cautious at these levels.”
California, the most-indebted U.S. state, increased its general-obligation offer last week to $2.7 billion from $2 billion because of market reception that Tom Dresslar, spokesman for Treasurer Bill Lockyer, called “very positive.”
The deal pushed issuance to a combined $11.7 billion for the week, the most since mid-June, data compiled by Bloomberg show.
“We were seeing outflows and yet the market was performing well,” said Jamie Pagliocco, director of bond managers in Merrimack, New Hampshire, at Fidelity Investments, which oversees $33 billion in local debt. “Our market tends to shudder a little bit when there are a few big deals there isn’t interest in.”
Munis have failed to keep pace with Treasuries in the past week. At 1.76 percent, yields on benchmark munis due in 2023 are about 104 percent of the interest rate on like-maturity federal securities. That ratio fell below 100 percent last week for the first time since March 12. The higher the percentage, the cheaper munis are relative to Treasuries.
Fidelity’s Pagliocco was among investors expressing concern that a slowing economy could worsen the finances of local governments, which are still mending their balance sheets almost four years after the end of the 18-month recession.
Moody’s Investors Service said in a report this month that it has most areas of the municipal market on negative outlook because of “lingering budgetary stress and weak revenue growth.”
The International Monetary Fund trimmed its 2013 growth forecast for a fourth time, with the U.S. outlook reduced to incorporate government spending cuts. Payrolls in the U.S. had the smallest gain in nine months in March.
At the same time, a slower economic expansion could rekindle demand for fixed-income securities at a time when most investors expect interest rates to rise. Ten-year Treasury yields are expected to climb about 0.55 percentage point to 2.25 percent by year-end, according to the median forecast of 66 analysts in a Bloomberg survey.
“The weak economic data we’ve seen over the last two weeks diminishes the fear everyone had that rates were going up in short order,” Mauro said.
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