Local Debt Beating Treasuries for Longest Since ’06: Muni CreditBrian Chappatta
The $3.7 trillion municipal market is at risk of ending its longest streak of gains in 20 years. It’s still winning when compared with other fixed-income assets.
Local debt has lost 0.1 percent this year through June 7, and is poised to end a nine-quarter rally, Bank of America Merrill Lynch data show. Still, munis are surpassing Treasuries and company securities, which have dropped more than 1 percent. When adjusted for risk, the historically less-volatile local-government market has beaten U.S. and corporate bonds since the start of 2011, the longest stretch since 2006.
State and city borrowings have been buoyed this year by investors avoiding higher federal income-tax rates. Benchmark 10-year munis yield 2.21 percent, about the same as similar-maturity Treasuries, data compiled by Bloomberg show. For top earners, that equals a 3.66 percent taxable level.
“The taxable-equivalent yield that muni bonds offer is extremely attractive relative to what you’re getting anywhere in the corporate and Treasury market,” said Mark DeMitry, senior portfolio manager at OppenheimerFunds Inc., who oversees about $38 billion in local debt from Rochester, New York. “Munis are poised to outperform other fixed-income assets.”
While individuals have favored the relative safety of fixed income since the financial crisis, signs of a U.S. economic rebound have lured buyers to riskier assets such as stocks. Investors pulled $9.1 billion from bond funds in the week ended June 5, the second-most since 1992, Lipper US Fund Flows data show. Muni funds lost $1.5 billion, the most this year.
The flows were driven by “sticker-shock” from fixed-income declines in May, Chris Mauro, head of muni strategy at RBC Capital Markets LLC in New York, said in a report last week.
Bond markets globally posted their biggest monthly losses in nine years in May on signs the world’s biggest economy is sustaining a rebound from the longest recession since the 1930s. The muni market sank 1.3 percent as benchmark 10-year yields rose 0.42 percentage point, the most since October 2009.
Standard & Poor’s revised its outlook on the U.S. to stable from negative yesterday. Payrolls rose 175,000 in April, Labor Department figures showed June 7, exceeding the median forecast of 163,000 in a Bloomberg survey.
The economic recovery has helped propel a seven-month rally in the S&P 500 Index of shares, the longest win streak since 2009. It is outperforming federal, corporate and muni debt as well as commodities in risk-adjusted returns for the first time since 1996.
“Part of the weakness we’ve seen in municipal bonds and some of the higher credit-quality asset classes is investors have begun to shift some assets into equities,” said Jeff Margolin, a closed-end fund analyst in Wheaton, Illinois, at First Trust Advisors LP, which oversees about $70 billion.
“For the higher credit quality portion of the portfolio, municipal bonds remain the most attractive,” he said.
The ratio of yields on 10-year munis to those on similar-maturity Treasuries, a measure of relative value, is about 100 percent, the lowest since May. The lower the figure, the more expensive local debt is in comparison. The ratio has averaged 92 percent since 2001 as investors typically demand less to own munis for their tax-free income.
Yields on tax-exempt bonds exceed those on taxable corporate debt. Company borrowings with an average rating of AA and due in about 30 years yielded 4.21 percent as of June 7, Moody’s Investors Service data show. The interest rate on general obligations with a similar rating and maturity was about 4.28 percent, Bloomberg data show.
New York City Transitional Finance Authority and Illinois are among issuers bringing $8.3 billion of debt to market this week, data compiled by Bloomberg show. That’s the biggest wave since mid-April.
Illinois, which had its general-obligation grade cut last week by Moody’s and Fitch Ratings, plans to issue sales-tax-backed bonds. The securities have S&P’s highest credit grade.