It has been a shaky couple of months for retail municipal bond investors.
The demise of 85-year-old Bear, Stearns & Co. in a bargain basement sale to JPMorgan Chase & Co. is the latest news to rattle investors still reacting to the collapse of the auction-rate securities market and the series of Federal Reserve rate cuts that have slashed yields on savings accounts and CDs.
Analysts said events have compounded retail investors' fears about the quality, stability, and liquidity of the overall municipal market - yet some are also capitalizing on the higher yields and the ability to buy munis yielding more than Treasury bonds.
The auction-rate crisis itself has brought with it substantial secondary market supply as issuers rush to convert auction-rate debt to fixed or variable rate.
With millions of dollars of ARS held in high-net-worth retail accounts, the crisis has been most troublesome for those that believed their money was parked in an ultra-safe cash equivalent, and has left many of them scrambling for other short-term alternatives.
"You are seeing a fair amount of people who got out of auction rates redeploying money someplace else - stretching out on the municipal curve, or buying stocks, equities, or money markets," said one analyst at a retail shop in the Midwest. "They want the ultimate in safety, so a lot of them are going to government money funds and waiting this one out."
Those investors "are primarily hurt by holding the now-illiquid auction-rate securities," noted Rick Calhoun, a first vice president of retail sales and trading at Crews & Associates Inc. in Little Rock.
Meanwhile, an underwriter at a California retail firm who asked not to be identified said the collapse came at the most inopportune time for investors who typically access short-term cash vehicles to pay income taxes come April.
The crisis has not only changed investors' behaviors, but altered municipal valuations, making munis historically attractive when compared to other investments.
"The retail investor is very cognizant of that and some of them are really interested in [long-term] municipals at these levels because of what's happened in the auction-rate market," he said.
In the weeks since auctions began failing, the municipal yield curve has weakened, resulting in long insured munis providing returns north of 5%, while its 30-year Treasury counterpart has been hovering slightly above 4.20%.
This week, a triple-A insured general obligation bond due in 30 years yielded 5.12%, according to Municipal Market Data, while a 30-year Treasury bond this week yielded 4.33%, according to data from the Treasury Department Web site, www.treas.gov.
The current relationship between municipals and Treasuries has retail actively seeking out value in both the long-term and short-term markets.
"We are seeing investors actually entering the market for the first time looking to exploit the above-market rates" on auction-rate securities, said Gary Strumeyer, managing director at BNY Capital Markets Inc. "We are definitely seeing buying by the more sophisticated, high-net-worth retail investors looking for good underlying municipal credits double-A or better with high fail rates."
Others agreed that the volatility presents value.
"Many affected investors are moving to cash as a short-term alternative while taking advantage of opportunities on the long end of the curve," Calhoun said.
In addition, Calhoun said retail buying has been strong on the long end of the curve recently as high-grade munis have hit the market at distressed prices as a result of hedge funds being forced to liquidate to meet margin calls.
Bill Mason, a first vice president of municipal trading and underwriting at David Lerner & Associates Inc. in Syosset, N.Y., said the relationship between munis and Treasuries - combined with the existing market turmoil - is creating a window of opportunity for retail investors.
In addition, Mason said the overall volatility is reinforcing the flight to quality, leading retail to the long-term municipal market as a safe haven. "Other investment options have been marginalized," he said.