By Jeremy R. Cooke
May 1 (Bloomberg) -- Municipal bonds posted their biggest April gains in two decades as the advent of federally subsidized taxable offerings from state and local governments reduced new tax-exempt debt issues by about 29 percent from last year.
The Municipal Master Index, a gauge of total investment return compiled by Bank of America Corp.’s Merrill Lynch & Co., rose 2.5 percent last month, the best since the April 1989 gain of 3.3 percent. Another Merrill index of U.S. Treasury and federal agency securities lost 1.4 percent.
“It’s been a pretty strong run, but I still think we’re positioned for favorable relative performance” versus Treasuries, agencies and other high-quality assets, said R.J. Gallo, who oversees $600 million of municipal bonds as portfolio manager at Federated Investors in Pittsburgh.
California, the largest borrower in the municipal market, led this month’s issues of more than $7.6 billion in Build America Bonds from the Obama administration program that rebates part of state and local governments’ interest costs on taxable bonds. Long-term tax-exempt debt sales dropped to about $25.3 billion from $35.6 billion in April 2008, according to data compiled by Bloomberg that doesn’t include variable-rate securities.
Yields on AAA general obligation bonds due in 30 years ended the month 20 basis points lower at 5.05 percent, according to Municipal Market Advisors of Concord, Massachusetts. A basis point is 0.01 percentage point.
Florida’s Citizens Property Insurance Corp. led about $5.5 billion in municipal bond sales this week, with a $1.64 billion tax-exempt deal that included securities due in one to eight years. The state-run insurer carries ratings of A+ from Standard & Poor’s and A2 from Moody’s Investors Service.
‘Sign of Improvement’
It’s “another sign of improvement that these A rated names are coming to market and they are able to get deals done,” Gallo said. Investors “had become unreasonably bearish on muni creditworthiness,” he said.
The municipal market pared some of its gains this week, as issuers including Citizens, the Northern California Transmission Agency and San Francisco-based Catholic Healthcare West cut prices and raised yields on their new issues to entice buyers.
The New Jersey Transportation Trust Fund Authority postponed its planned offering of state appropriation-backed bonds on April 28. Governor Jon Corzine yesterday said the delay was prompted by declines in state tax revenue.
The Bond Buyer newspaper’s weekly 20-year general obligation yield indexrose 13 basis points to 4.7 percent yesterday, still below its April 16 level.
Investors this month added to municipal-bond mutual funds, with $3.15 billion in net new cash reported during the three weeks ended April 22, based on the latest figures available from the Investment Company Institute in Washington. That’s up from the previous three weeks’ total of $2.69 billion.
To contact the reporter on this story: Jeremy R. Cooke in New York atjcooke8@bloomberg.net.
