MuniLand

Muniland on fire

By Cate Long
January 11, 2012

In a sign of enormous investor demand, the benchmark for the municipal bond market hit an all-time low today. The Thomson Reuters MMD scale for AAA bonds maturing in 10 years finished the day at 1.82 percent, the lowest level since 1981.

This means an investor buying a AAA-rated tax-exempt bond maturing in 10 years would receive an annual yield of 1.82 percent. According to Morgan Stanley, the yield on an equivalent taxable bond would be 2.78 percent for a New York State resident in the 28 percent federal tax bracket. Judged against previous years, it’s not much of a return, but interest rates have been so low for so many years that investors are chasing yields in every corner of the market.

The average Thomson Reuters MMD 10-year AAA yield for the last decade has been 3.46 percent (5.28 percent for a taxable equivalent). When markets broke down in October 2008, yields went haywire and hit their 10-year high of 4.86 percent (7.42 percent for the equivalent taxable bond).

What’s next for muniland? Daniel Berger of Thomson Reuters MMD said the benchmark hit its low because upcoming municipal bond issuance was so light and demand was so strong. “This means that the pipeline of deals is low. Demand vastly exceeds supply, and muni prices could get even higher,” he told me.

The 64 thousand dollar question for market participants is: At what level do low interest rates turn off investors and cause them to move to another asset class? It’s a little hard to gauge for muniland because it’s tough to trade in and out of the market unless you are an institution that has good sales coverage from the broker-dealers. Individual investors tend to buy and hold muni bonds, and these interest rates might not be appetizing for long-term purchases.

This fire could burn a little longer and brighter, but it will cool off eventually. It might pay to sit and watch it cool down a bit before stepping in.

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