BondsOnline.com: instant access to and extensive coverage of over 3.5 million stocks, bonds, indexes and other securities covering major and emerging markets and exchanges across the globe.
Munis Underperform Treasuries as Default Speculation Mounts
Bloomberg - June 30, 2010 - By Darrell Preston
Municipal bonds underperformed U.S. Treasuries in the first half as default speculation drove state and local government yields to the highest level relative to government bonds in 13 months.
Ten-year municipal bond yields rose to 100 percent of Treasuries for the first time since May 2009, from 80 percent six months ago, according to Municipal Market Advisors data. Investors bought Treasuries, pushing two-year yields to a record low this week, on signs of slowing global economic growth and amid protests in Europe over austerity measures.
The cost of contracts insuring against losses in municipal bonds almost doubled in the past two months, led by Illinois. Greece and Spain led a surge in the cost of protecting sovereign debt.
“The Treasury market rallied its brains out,” said Brian Battle, vice president of trading for Performance Trust Capital, a Chicago-based institutional portfolio adviser. “Munis haven’t followed as much.”
Financial pressure on states and municipalities has built as revenue fell in the wake of the recession. More than two- thirds of states had a drop in revenue last quarter over the same period in 2009, the Nelson A. Rockefeller Institute of Government said this month. States will have confronted $296.6 billion of budget deficits from 2009 to 2012, the National Governors Association and National Association of State Budget Officers said.
Pennsylvania Capital
Harrisburg, Pennsylvania, capital of the sixth most- populous U.S. state, has considered filing for bankruptcy protection in the face of $68 million in debt payments tied to an incinerator project.
Illinois, whose $13 billion deficit is about half its budget, had the cost of insuring its debt against default more than double since early April, to a record of 370 basis points, or $370,000 to protect $10 million of debt, according to CMA DataVision. A basis point is 0.01 percentage point.
“You’ve gotten a lot of negative press about municipal bonds,” said J.R. Rieger, vice president of fixed-income indexes at S&P in New York. “Yields have been driven down on U.S. Treasury bonds due to a flight to quality.”
Investors in the $2.8 trillion municipal-bond market on average earned 3.13 percent this year through June 28, compared with about 7.3 percent in the same period of 2009, according to S&P’s Investortools Municipal Bond Main Index. Treasuries brought in about 5 percent, according to S&P. Corporate bonds returned 5.8 percent, Credit Suisse’s Liquid U.S. Corporate Bond Index shows.
Default Ratio
Municipal investors may be worrying unduly given the debt’s low default ratio relative to other asset classes, said Battle at Performance Trust and Jim Colby, a senior municipal strategist for New York-based Van Eck Associates, which has about $515 million of municipal bonds. Companies are 98 times more likely to default than muni issuers over a 10-year period, data from Moody’s Investors Service show.
The volume of municipal defaults has also declined. Nineteen issuers have defaulted on about $1 billion of municipal debt this year, the Distressed Debt Securities Newsletter reported in its June issue. In the two previous years a combined $14.5 billion defaulted, a rate of $3.6 billion every six months.
Income Security Recommendation December 2011 Issue.
Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now!
