Muni bond yields inch up as market rally stalls
The municipal bond market’s recent rally has run out of steam this week, as some potential buyers apparently don’t see current tax-free yields as high enough to compensate for the risks.
The annualized tax-free yield on the Bond Buyer newspaper’s index of 40 long-term muni issues nationwide (charted, below) edged up to 5.73% on Wednesday from 5.71% on Tuesday. That was the first increase in two weeks.
It’s not helping the muni market this week that U.S. Treasury bond yields have been rising, reacting in part to strong economic data. The 10-year T-note yield was at 3.53% on Thursday, up from 3.37% on Monday and a seven-week high.
The muni market suffered a vicious sell-off beginning in late October, first as investors shied away from bonds in general, then as fears mounted about the strained finances of many state and local governments.
Those fears were fanned by Wall Street banking analyst Meredith Whitney, who warned in late December that “hundreds of billions of dollars” in muni bonds would default in 2011.
Whitney has been savaged since then by many muni market pros who say her default predictions are vastly overstated, and that she triggered needless panic among some muni investors.
Bloomberg News wrote a long piece on Whitney on Tuesday. In an interview she told Bloomberg that she didn’t have specific numbers to back up her default estimate.
“Quantifying is a guesstimate at this point,” she said. “I was giving an approximation of a magnitude that will bear out to be correct.”
Even as other muni investors continue to seek to discredit Whitney, muni mutual funds still are suffering net redemptions as sellers outnumber buyers. Redemptions totaled $2.7 billion in the seven days ended Jan. 26, down from $5.7 billion the previous week but still the 12th straight week of net withdrawals, according to the Investment Company Institute.
The funds, which owned $473 billion worth of munis at year-end, normally provide critical long-term support for the $2.9-trillion market. As investors pull their money, fund managers can be forced to sell bonds to raise cash, dumping more securities into a market still struggling to find buyers.
Despite lucrative yields on munis, “There’s not a lot of excitement for them, though there should be,” said George Strickland, a veteran muni fund manager at Thornburg Investment Management in Santa Fe, N.M.
-- Tom Petruno