November’s Muni Selloff – What Happened?

The selloff in municipal bonds in November resulted in an increase in yields by more than half a percentage point on high quality, long-term munis.  After a steady climb for most of the year, prices started to decline in early November, with most of the gains for the year offset in a matter of a week.  As the dust clears, it’s evident that the muni market has been affected by a “perfect storm” of higher U.S. Treasury yields, driving interest rates generally higher and, in parallel, states and municipalities flooding the market with new issues. 

 SURGE IN SUPPLY
The sudden surge in issuance resulted from the possibility of Congress allowing the Build America Bonds program (BABs) to expire at year-end.  Issuers reacted with a very large issuance of long-term municipal bonds.  This supply imbalance sent yields upward and bond prices downward.  Retail investors, confronted with rising rates, reacted to the possibility of these rates moving much higher and quickly liquidated billions of dollars out of bond mutual funds, magnifying the overall selloff.

 RESULTING SUPPLY IMBALANCE
Rather than a credit correction, the selloff was the result of a supply imbalance combined with reactionary mutual fund selling.  Since the selloff, the market has calmed with primary and secondary market supply diminishing as year-end approaches.  As the expected seasonal effect plays out, we anticipate yields to correct themselves with increasing demand and easing of supply-side stress. 

 THE SKY ISN’T FALLING
With some of the cheapest yield levels for municipal bonds in over a year, a compelling buying opportunity exists. Helen Avery from EuroMoney agrees in her recent article – read it here

 Below are highlights of both tax-free and taxable municipal calendars from the week of 11/29/10:

 TAX-EXEMPT ISSUANCE

Issuer Maturity Yield
Minnesota State Office of Higher Education Student Loan Revs (AA) 2021 4.11%
2029 5.00%
Montgomery Cnty MD Multifamily Housing Revenue Bonds (Aaa) 2020 3.70%
2026 4.50%
2037 5.125%

 TAXABLE ISSUANCE

Issuer Maturity Yield
Katy Texas Schools PSF Guaranteed Build America Bonds (Aaa/AAA) 2022 4.538%
2025 5.288%
2041 6.349%
Colorado Building Excellent Schools Build America Bonds (Aa2/AA-) 2015 3.728%
2020 5.144%
2025 6.344%
2031 7.017%
Missouri Jt. Municipal Electric Build America Bonds (A3) 2020 5.718%
2032 7.597%
2042 7.897%

 MainLine West is committed to helping you understand the dynamics of the municipal bond market and to identify potential opportunities.  The current volatile market requires competent navigation and skilled investment advisors to realize maximum performance and risk management.  We appreciate your confidence and interest in MainLine West and the chance to help you capitalize on the opportunities that continue to exist in the municipal bond market.

Advertisements
Tagged with: , , , , ,
Posted in Munis in the news, State Budgets, Stimulus Pogram, Taxes

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: