| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Analysis: Municipal bond prices, at peak, look wobbly |
Reuters - Sept. 2, 2010 - By Michael Connor
August's buying rally knocked tax-free debt yields below the lows plumbed during the global credit crisis and left U.S. municipal market investors readying for a correction.
Eventually.
That's the view of muni traders and portfolio managers surveyed by Municipal Market Data, which reports that traders last week eased from bullish short-term expectations to a neutral, or wait-and-see, stance.
Only 12 percent saw muni prices sinking and yields climbing in the coming week, as opposed to 69 percent who were neutral, up from 50 percent a week earlier, according to MMD data.
That's a doubling of bearish feelings from the previous week but nowhere near a 76 percent pessimistic outlook registered last October, when the market sold off and yields on AAA-rated 10-year munis rocketed to 3.03 percent from 2.57 percent.
Yields on benchmark 10-year bonds now are at 2.19 percent, as the striking gains of recent weeks have spurred remarkably little talk that the $2.8 trillion market for municipals is in a price bubble.
"A bubble suggests speculative endeavors. I don't think that is what is going on, unless you are a huge Fed critic," said Jim Colby, senior municipal strategist at Van Eck Global in New York, referring to the ultra-low interest rate polices of the U.S. central bank. "I do think we will have a pullback."
In August, munis climbed with few pauses and had total returns of 2.38 percent, or a third of 2010's returns so far for tax-free debt, according to Bank of America Merrill Lynch indexes. Treasuries, by comparison, had returns of interest payments and capital gains totaling 1.84 percent in August.
As muni prices paraded ahead last month, yields tumbled and repeatedly broke record lows. The benchmark, AAA-rated 10-year ended August at 2.18 percent, a basis point higher than its all-time low set on August 25 and 39 basis points below last October's level. The 30-year ended August 64 basis points down from last October, according to MMD.
STILL POPULAR
Such puny yields generally discourage buying by wealthy Americans, the core of the muni market, who want the securities for income and long-term holdings. But, judging from strong cash flows into muni mutual funds and other indicators, low payouts are being swallowed, according to portfolio managers.
"There is still an argument to be made for munis," said portfolio manager Evan Rourke at Eaton Vance in New York, "Relative values, in terms of ratios to Treasuries, are still attractive."
Portfolio managers attribute August's shoot-up in munis to heavy mutual-funds buying driven by investors fleeing painfully low-yielding money market funds, wide expectations of federal tax-rate increases that make tax-exempt yields more valuable, and light issuance of new bonds by local governments.
"We are approaching levels like they were in the first quarter of 2008, when the muni market was in disarray and the flight to quality was proceeding," Colby said. "We are at a point where the only thing that's certain is that the Federal Reserve is not going to change its stance on interest rates for the next 12 months."
Muni prices in the first three months of 2008 rode a roller coaster, with bond insurers in crisis and the market's auction-rate debt sector freezing up. Yields on AAA-rated 10-year issues tracked by MMD dipped as low as 3.17 percent and shot as high as 4.12 percent.
Prominent mutual fund group Nuveen Investments is sheltering its strong August muni gains against a possible pullback by focusing new purchases on shorter maturities, according to Nuveen portfolio manager Tom Spalding.
"A market correction is closer, rather than further away," said Spalding, adding he sees no repeat of 2008, the depths of the global credit crisis when munis lost 4 percent and Treasuries sought as a safe harbor gained 13 percent.
"I don't see that happening again," Spalding said. "We could have a modest liquidity event, but anything would be much more subdued. We don't have the same level of leverage. There were crossover accounts at leverage of 20 to one or 100 to one. Those guys got a healthy dose of humble pie and are not a big factor. We know for a fact hedge funds are not that active."
A pickup in new tax-free deals expected after the U.S. Labor Day weekend beginning Saturday will be a test, according to money managers.
The 30-day tally of coming new issues now stands at just under $6 billion, or about 25 percent below the average of the last two months, according to MMD.
Many portfolio managers, strategists and traders expect the flow of new deals to increase in coming weeks, but some see issuers as too hard-pressed to step up debt sales even at such low interest rates.
Overall issuance of $261 billion in new munis so far in 2010 is marginally ahead of last year's pace. But tax-exempt offerings are off 19 percent at just $175 billion because taxable munis now claim a larger share of the primary market, according to Thomson Reuters data.
That tax-exempt scarcity has helped lift muni prices.
"My guess is people will buy new issues," said Laura LaRosa, fixed-income chief at Glenmede Trust Co in Philadelphia. "For the most part, people are really worried about the markets and leaving the stock market for fixed income. People are in a fixed-income mood."
(Editing by Padraic Cassidy)
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