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In Storm's Wake, Election Gives Munis a Record-Smashing Lift

NOV 8, 2012 10:08pm ET
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Results from the U.S. elections on Wednesday provided a record-breaking boost to a municipal market still recovering from last week’s hurricane.

The elections’ conclusion and news of President Obama’s re-election as well as Democratic gains in the Senate augured well for the muni market, promising more certainty and likely higher tax rates. The finality of knowing who will to be in office going forward should go some ways toward providing direction for investors, muni pros say.

Quiet for the early part of the week, tax-exempt yields on Wednesday plunged as much as eight basis points in the belly of the curve and fell another four basis points Thursday. Muni yields breached a record low in the 30-year section of the curve Wednesday and pushed even lower Thursday to 2.69%, while the 10-year touched a record low at 1.59%.

For their part, muni bond indexes fell on all but the short end — some to levels they haven’t seen in more than 45 years — reflecting lower rates except at the front end of the yield curve. The Bond Buyer 20-Bond general obligation bond index, which has a 20-year maturity, declined 12 basis points this week to 3.55%, which is the lowest level for the index since April 13, 1967, when it was 3.54%.

The Bond Buyer 11-bond GO index, which measures higher-grade GO bonds maturing in 20 years, dropped 14 basis points this week to 3.32%. That is the lowest the index has been since Feb. 2, 1967, when it was also 3.32%.

The yield on the 10-year U.S. Treasury note dropped nine basis points this week to 1.63%, which is the lowest level for the yield since Aug. 30, when it was also 1.63%. The yield on the 30-year Treasury bond dropped 14 points this week to 2.76%, the lowest the yield has been since Aug. 30, when it was 2.75%.

Two factors concerning the municipal market bear consideration, according to Alan Schankel, a managing director at Janney Capital Markets. For one, the demand side is still pretty much intact; although flows to muni bond mutual funds last week were down, they reflected a closed market and fewer trading days rather than falling demand.

Secondly, the certainty that comes from the election’s conclusion, independent of the actual results, lifted the market, he added.

Investors can prepare for certain eventualities. Obama’s health care reforms are likely to remain intact, and both political parties have made welcome overtures about the looming fiscal cliff.

“Everyone realizes where we stand and that there are big issues to fix,” Schankel said. “And the president being reelected means we’ll have a relatively accommodative strategy on the Federal Reserve, meaning [chairman] Ben Bernanke will stay. That affects interest rates.”

Deals on the week have been well-received, traders said. Appetite for new tax-exempt paper remains strong among investors that continue to see relatively small calendars for this time of the year.

Since last Friday, tax-exempt yields after the short end of the curve have fallen precipitously, Municipal Market Data numbers show. The benchmark triple-A 10-year fell 14 basis points over the period to an all-time low of 1.59%.

The 30-year plunged 13 basis points since last Friday to a record low of 2.69%. The two-year held fast at 0.30% for a 32d straight session.

The Bond Buyer revenue bond index, which is based on 25 revenue issuers and has a 30-year maturity, dropped six basis points this week to an all-time low of 4.23%. The previous low was 4.28% on Oct. 4. The index began on Sept. 20, 1979.

The Bond Buyer one-year note index, which is based on one-year GO yields from 10 issuers, was unchanged this week at 0.22%. That is still the highest level for the index since Oct. 10, when it was 0.23%.

 

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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