By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) -- Municipal bonds have returned almost twice as much as corporate debt so far this year because of lower issuance of tax-exempt debt and less volatility in all bond markets.
Municipal bonds of all maturities and ratings have returned almost 8.6% so far in 2009, according to an index compiled by Bank of America-Merrill Lynch. Corporate debt has returned about 4.5% this year, while government debt has lost 2.2%, according to the firm.
Since January, offerings from states, cities, school districts and other municipal bond issuers has totaled about $134 billion, Bank of America-Merrill Lynch analysts said in a report Monday. That compares to $160 billion in the same period in 2008. The drop is mostly attributable to less refunding of outstanding debt, less issuance of housing debt and the sharp contraction of the variable-rate debt markets, said Philip J. Fischer, municipal strategist at the firm.
Investors and analysts have speculated that the ability to issue federally-subsidized, taxable Build America Bonds, a new program that was part of the federal stimulus package earlier this year, would sharply curtail issuance of tax-exempt debt, the traditional path for municipalities.
While California, the New Jersey Turnpike Authority and a handful of universities kicked off issuance of BABs, taxable muni sales have totaled $15 billion this year, up only about $4 billion from last year, according to Merrill.
In addition, the volatility in bond markets, measures by Merrill's MOVE index, has dropped to levels not seen since Lehman Brothers (LEHMQ 0.06, +0.00, +2.25%) declared bankruptcy, sending all credit markets frenzy.
"Investor confidence is returning as the MOVE index of bond volatility has stabilized at levels not seen since last August, Fischer said.
Investor demand has increased, with mutual funds receiving more than $1 billion for the sector for the second week in a row, according to the report.
