Wednesday, October 15, 2008

Muni Bond Yields

"Municipal money-market yields are soaring as investors flee tax-exempt debt in a rush to safety across the credit markets. ... Tax-free money-market funds saw $23 billion in net outflows in recent days, according to iMoneyNet Inc., as investors have flocked to safer Treasurys. ... The yield escalation has been striking. According to a Securities Industry and Financial Markets Association index, high-quality municipal bonds rose to 7.96% Wednesday, from 5.15% in the prior week and 1.79% the week before that. ... But now 30-year municipal bonds yield about 120% of 30-year Treasurys. That ratio is 'about as high as it's ever been,' says Matt Fabian, senior municipal analyst at Municipal Market Advisors", Diya Gullapalli at the WSJ, 27 September 2008.

People flock to Treasurys for safety? Wild!

1 comment:

Anonymous said...

Municipal yields are moving higher for many reasons: 1) reduced liquidity due to bank/broker consolidation and balance sheet constraints, and 2) forced liqiudation of municipal hedge funds - specifically tender option bond programs - that historically have taken advantage of the difference in the steepness on the municipal curve relative to the libor curve. In order to carry this trade, they must have reasonable funding in short-term money market investments. Right now they don't. Firms had been exiting this trade for over a year, and the industry is close to finishing. The problem is that until now it has been orderly. The final players are being forced out just like an equity margin account would be liquidated when the equity value fell too low. These pressures are most accute in the long-end of the market, and there is great concern around a few sectors specifcally tobacco bonds (because they are levered by some). If you can look through the smoke surrounding the industry, there is great opportunity, but in the short-term the market is unlikely to improve.

If you are in your fifties, this is as big an opportunity as that of a 30-year old looking to buy a house. You can lock in 6% for 25 years, tax-free. If you are willing to invest in high-yield munis, you are closer to 8.5 % or higher. The best ways to play are mutual funds or new issues - secondary retail trades are way too expensive. The new issue market has been locked up, but is starting to come. The sweet spot on the curve is 15-years where you can get 6% or higher in the new issue market. Good luck, and remember, do this now and you won't have to worry about money for a long time!

Some of you may be worried about credit quality. Think essential service revenue bonds or general obligations. The government didnt let FNMA default, they aren't going to let California default.