Year-end in muniland, part 1

December 13, 2011

Lots of excellent municipal bond market analysis is coming muniland’s way, and I’ll be sharing some of it through the end of the year. First up is Daniel Berger of Thomson Reuters Municipal Market Data, who makes an interesting point about the municipal bond yield curve. He notes that the 10-/30-year slope (or difference in yield on 10-year AAA bonds and 30-year AAA bonds) has rapidly steepened since August 1. Berger attributes this to the great performance of 10-year AAA bonds over that period. In a little over two months their yield has dropped from about 2.55 percent to under 2.00 percent. Investors are loving these bonds — it’s a full on “flight to quality.”

Berger next gives us a snapshot of flows in and out of municipal bond funds. After a very rough beginning to the year it looks positive going into year end:

Muni bond funds posted about $1.04bln of net inflows for the week ended December 7, according to data released on Thursday by Lipper. This was the biggest inflow since March 10, 2010, when investors put $1.13 billion into the funds. The latest week’s inflows were a sharp turnaround from the almost $298mln of outflows seen in the prior week, which was the first negative reading in seven weeks.

The four‐week moving average remained positive atabout $344mln. From early November 2010 until June 8, 2011, muni funds recorded 29 consecutive weeks of outflows. Since then,the fund flows have been mixed (but generally positive), posting inflows for seventeen weeks and outflows for eleven weeks.

And lastly, he looks into historical default data for municipal bonds:

During 2011, America Airlines (AA) accounted for $3.4 billion of muni defaults while Tobacco bonds had $16.9bln of defaults. Combined, AA and the tobacco bonds comprised slightly more than 87% of municipal bond defaults. Even though the volume of defaults has risen (and may continue to rise due to the presence of $50bln of outstanding Tobacco Bonds) we do not believe that there are systemic problems within the muni market. While there will be some strain among municipal issuers there will not be “hundreds of billions” of defaults that were forecast by doomsayers with little knowledge of municipal finance. We forecast that state and local governments will have less than $10bln of defaults during 2012.

Overall, it’s still looking pretty good in the municipal bond market. It’s good to get the 30,000-foot view of muniland sometimes. More to come.

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