Market Close: Triple-B's Attractiveness a Toss Up

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Municipal bond analysts are divided over whether the market sell-off this week has made triple-B paper more attractive to buy.

Yields on municipal bonds rose by 11 points for the benchmark 10 and 30 year triple-A general obligation bonds from Monday's to Thursday's market close, according to Municipal Market Data.

On Friday, yields on munis maturing in six to seven years yields rose by three basis points, according to MMD.

Yields increased by four basis points bonds maturing in eight to nine years, by three basis points on bonds maturing in 10 to 13 years, and by two basis points for bonds maturing in 14 to 30 years.

Yields are high enough compared to Monday to signal a change in the market atmosphere, according to traders.

Many traders said the sell-off makes it a good time to buy triple-B paper, because their spreads are likely to widen further then come in more when the market strengthens again, but not everyone agrees.

John Dillon, managing director at Morgan Stanley, said that he is "still a fan of BBB revenue bonds.

"Contrary to the credit concerns of 2013, it's been a great year for spread compression and unexpectedly low rates have certainly fueled the search for yield," he said. "That said, I do believe that muni credit continues to improve generally, benefitting from modest U.S. growth coupled with somewhat lower-for-longer rates."

He expects spread tightening to resume in early 2015.

"Any prospective widening in the coming weeks could present an opportunity," Dillon said.

Anthony Valeri, senior vice president of research at LPL Financial, said in an interview that he doesn't think the sell-off has been a big enough mood shift to convince him that investing in triple-B paper is a good idea, especially since the muni market has tightened so much in 2014.

"Its 20 to 30 basis points we've seen spreads tighten this year," he said.

"To me [the recent sell-off] is not enough to warrant the investment," he said. "Yes, the valuation is cheaper, but you are still left with low interest rates, low yield, and you still have some interest rate risk."

He said he would like to see a bit more widening, probably another 20 basis points, before investing in triple-B.

"Part of the reason I don't think it's the right time to invest in triple-B bonds is just being leery after a strong year-to-date performance," he said.

"That's because a lot of the performance is in the rearview mirror, I'd probably stick with some of the higher quality names."

He said that he would recommend investing in single and double A names.

Treasuries firmed on Friday with the two-year note's yield falling by one basis point to 0.41%, the 10-year's by two basis points 2.27%, and the 30-year's by one basis point to 3.04%.

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