The December-January reinvestment season in the municipal bond market will arrive at a time of rock-bottom yields and historically low new issuance.
But investors, seeing low municipal default rates, relatively attractive ratios to Treasuries, rocky equities, and undercapitalized financial institutions in Europe, are likely to put their money back to work in the muni market, industry pros said.
Lately, many investors have been particularly heavy in cash and they are wondering what to do with their money, according to Justin Hoogendoorn, managing director of the strategic analytics group for the BMO Capital Markets fixed-income team.
“You do have a lot of money rolling off, a lot of reinvestment that’s looking to come back into the market,” he said. “Rates are very low, but [the muni market] is going to be a place where people can get a little bit extra without reaching too far. Because trends have been problematic in so many other areas, munis are just a natural, high-quality place for investors to put their money.”
Coupon payments and bond maturities typically spike twice a year, in June-July and December-January. This is because many municipalities issue bonds that mature in December or January of any given year and also make semiannual interest payments in those months.
Accurate reinvestment numbers can be somewhat difficult to find. December is looking at an estimated $30 billion to be returned to investors, a trader in Chicago said. This past summer, Interactive Data estimated that $78 billion would come due during the two-month reinvestment season in June and July. Those numbers fell from those of 2010, which totaled $101 billion.
Earlier this year, BMO Capital wrote in a research report that there is an estimated monthly average of around $15 billion in maturities per month. And January, June, July, and December are noticeably heavier coupon payment months as well, the firm added.
Nonetheless, when the money does return to investors’ hands next month, it should be put to work back in the municipal market quickly, according to Citi’s George Friedlander. The firm’s municipal market group, in a recent research report, anticipated there will be a “January effect” as the year-end approaches. That means as new-issue supply dries up and cash enters the market from heavy bond calls and maturities, the market will experience a rally into the new year.
“It is likely that such a rally will occur this year, unlike year-end 2010, when yields kept rising into the middle of January for a variety of reasons,” Friedlander wrote. “We would continue to put cash to work while the calendar remains active, particularly in states where new-issue volume is likely to dry up going into 2012.”
There is no guaranty that muni bonds will automatically see the reinvestment flows, whether it comes from maturities, called bonds or coupon flows. Recent muni bond mutual fund flow numbers have been positive though, recording inflows for six consecutive weeks, and for 10 weeks out of the past 11, Lipper LMI numbers showed. This reflects a growing confidence investors have in the market, muni analysts said.