Munis Outperform Treasury Bonds
Kurt Brouwer May 26th, 2008
Muni Yields Fall To Three-Month Low As Sanity Returns (Bloomberg, May 23, 2008, William Selway)
U.S. municipal bond yields fell to the lowest in three months as “sanity” returned to the tax- exempt market following the auction-rate rout, helping borrowers escape interest costs as high as 20 percent.
The benchmark Bond Buyer 20 index of yields on long-term tax-exempt debt fell to 4.52 percent this week, the lowest since Feb. 14. Rates declined from a high of 5.11 percent Feb. 28, after investors abandoned the $166 billion market for municipal bonds with yields set through periodic auctions. State and local governments have spent the last three months replacing the debt.
While yields on 10-year municipal bonds are 0.1 percentage point less than Treasuries of similar maturity, they were 1.15 percentage points less last June, according to data compiled by Municipal Market Advisors and Bloomberg. Municipal bonds typically yield less because, unlike Treasuries, investors usually don’t have to pay income tax on the interest.
“We’re not normal, but sanity has returned to the credit markets, and that’s flowed over to the muni market as well,” said Craig Elder, the fixed-income analyst for Milwaukee-based Robert W. Baird & Co., which manages $65 billion in its private wealth division.
Munis Outperform
Municipal bonds are poised to outperform Treasuries for a third straight month in May, pushing yields on 10-year, top- rated securities to about 97 percent of what federal securities pay. That’s down from 115 percent in March, when the seizure in credit markets caused investors to flee to the safest government securities and the failing auction-rate market stoked investor concern that refinancings would lead to a flood of new debt…
Who would have guessed that tax-exempt municipal bonds would get hit by the subprime lending mess? But they did get hit and falling prices for muni bonds represented a buying opportunity (see Tax-Free Muni Bond Yields Now Above Taxable Treasury Yields and Jane Bryant Quinn — Muni Bond Buying Opportunity). Now, things are getting back to normal and yields are falling while bond prices are rising. It’s a good time to own muni bonds or muni bond funds.
- Investing , Money , Mutual Funds , Personal Finance
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