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Frightened Investors Seek Shelter in Munis

Plenty of scary headlines were circulating in the global marketplace this week, prompting investors to flock to high-grade fixed income.

The stampede sent muni yields to all-time or multi-decade lows on Thursday as talk of a double-dip recession intensified and investors fled equities.

“Retail is definitely still buying,” said Richard Ryffel, managing director at Edward Jones.

He emphasized that his clients tend to have a steady-as-she-goes investment philosophy which hasn’t undergone great changes despite the broader volatility.

Municipal Market Data’s benchmark 10-year triple-A yield fell to a fresh record low on Thursday at 2.15%. That marked a 51 basis point cut from one month ago.

A rival scale from Municipal Market Advisors had the 10-year muni dropping to all-time low of 2.55%, a 35 basis point slide over the same period.

The Bond Buyer’s 11-bond GO index of high-grade 20-year general obligation bonds saw yields descend 13 basis points in the week, following a 51 basis point rally over the previous two weeks, to 3.55%. It now sits at its lowest since April 20, 1967. Since mid-January the index has fallen 166 basis points from 5.16%.

The Bond Buyer’s 20-bond index of 20-year GO bond yields tumbled 14 basis points in the week to 3.83%, its lowest since Oct. 14, 2010. The index has now fallen 64 basis points over three weeks.

“Folks that need tax-exempt income have buying habits that don’t change that much,” Ryffel said. “They are buying and laddering, rolling over bonds when they have a maturity or redemption, and filling up the hole in the ladder.”

Insofar as people are fleeing the equity market to fixed income, taxable-equivalent muni yields are a good place to be, he added. The 10-year tax-exempt yield offered a 103% of comparable Treasuries on Thursday, roughly 20 percentage points above its long-term average, according to MMD.

As in previous weeks, tax-exempt yields were tracking plummeting rates in the Treasury market. The 10-year Treasury yield even broke through the 2% barrier for the first-time ever Thursday, before closing the day at 2.09%, its lowest weekly finish since Dec. 18, 2008, and 26 basis points down from the prior week.

The 30-year Treasury yield declined further, falling 34 basis points in the week to 3.45%. That is the lowest since Jan. 22, 2009, when it was 3.25%.

Not all yields dipped to calendar-year lows. The revenue bond index, which measures 30-year revenue bond yields, rose a basis point to 5.10%. Its yield the week before was its lowest since Nov. 10, 2010.

The Bond Buyer’s one-year note index fell one basis point to 0.31% this week, but that’s still three basis points above its all-time low, reached on July 20. The data goes back to July 1989. The weekly average yield to maturity on The Bond Buyer’s 40-bond muni index, which is based on prices for 40 long-term muni issues, finished one basis point higher this week at 5.06%.

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