Lately a lot of big waves have washed over muniland. The national economy has slowed; the 2009 federal stimulus program to the states has ended; there have been loud headlines about bankruptcy cases in Jefferson County, Alabama and Central Falls, Rhode Island; and Standard & Poor’s downgraded the debt of the United States with potential effects on the borrowing ability of states and municipalities. It’s a laundry list of woes.
Considering all the strong forces facing muniland it’s interesting that the municipal bond market is still in such good shape and that interest rates on municipal bonds have remained low. There are two big reasons for this performance.
The first and biggest reason for smooth sailing is that muniland’s sister market, the U.S. Treasuries market, is having a tremendous rally as investors sail into the safe harbor of owning U.S. debt. Even though Standard & Poor’s downgraded U.S. debt to AA+ two weeks ago the U.S. Treasury market is both liquid and deep; it provides investors with security and a place to park assets. There has been so much demand for U.S. Treasuries that their yield (which moves in the opposite direction of the bond price) is nearing the ultra low yields of Japanese government debt. Bloomberg reports:
“We are beginning to resemble Japan from an interest-rate policy standpoint as well as potentially an economic growth standpoint,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said in a telephone interview Aug. 10. Investors are “fearful of low growth and are fleeing to high-quality sovereign paper at whatever yield.”
Investors’ flight to quality in the face of uncertainty benefits the muni market and helps create strong demand for municipal bonds. Numerous Wall Street dealers have also reported foreign investor demand for U.S. municipal bonds as U.S. Treasuries yields have moved so low.