Municipal bond buyers are unfazed by the prospect of an inevitable interest rate hike as long-term bonds remain the best investment in the $3.8 trillion muni market.
High grade municipal bonds maturing in 20 years posted a 10.2% return year to date, with yields dropping more than 65 basis points as of April 24, according to a Standard & Poor's Dow Jones index. Munis overall returned 4.56% over the same period, while high-yield bonds gained 6.69%.
Investors this week showed they're still willing to venture down the credit scale to get greater return from such lower-rated issuers as Illinois and New Jersey, even as volume touched the highest since early March.
"The long-end of the curve is the real star and that's kind of counter-intuitive in a rising interest rate environment," J.R. Rieger, global head of fixed income at SPDJI, said in an interview. "Investors are still seeking yield."
Munis are still considered a risk-off asset class and buyers that have turned toward quality as tension in Europe escalates are pushing gains in the sector, Rieger said.
"With the global dynamics with Ukraine and Russia pushing more of a risk-off mentality, munis on the long end and corporates are really showing very positive returns," Rieger said.
Illinois successfully placed $750 million of A-minus rated bonds in the market Thursday, following a year-to-date return of 5.73% on the state's bonds. On Wednesday, the market bought up $540 million of tax-exempt New Jersey Economic Development Authority bonds, which carried a freshly downgraded A rating by S&P.
"Picking up the lower credit is still in play," a New York-based trader said in an interview.
The Illinois and New Jersey deals didn't come without a few hurdles, though. Yields on the New Jersey refunding bonds climbed five basis points in repricing, and the Illinois general obligations were solid with wider spreads than previous issuances by the state this year.
Inflows to municipal bond funds are probably contributing to the willingness by market participants to pick up lower-rated bonds, Rieger said.
"There have been retail inflows into bond funds and as long as that's a positive and there's not a lot of other supply, I think what's happening is portfolio managers have this cash inflow and need to buy bonds," Rieger said. "They can't sit on cash. It becomes less a decision of whether they're the right bonds and more that the need to buy bonds."
