U.S. Municipal Bond Market Has Best Quarter Since 2009

CHICAGO (Karen Pierog) - The U.S. municipal bond market had its best quarterly performance in two years in the second quarter of 2011, besting both U.S. Treasuries and corporate debt, according to BofA Merrill Lynch Global Research on
Tuesday.

Munis had gains of 4.453 percent on a total-returns basis for the quarter, which ended on Thursday. That marked the best performance for the sector since the first quarter of 2009, when the market gained 4.425 percent on BofA Merrill Lynch
indices.

By comparison, corporate debt gained 2.295 percent and Treasuries gained 2.284 percent in the second quarter of 2011.

The $2.9 trillion muni market closed out 2010 with its worst quarterly performance in 16 years, losing 4.522 percent
on a total-returns basis.

Toward the end of last year, states, cities and other issuers rushed to sell debt to take advantage of an expiring Build America Bond program and its hefty federal rebate on interest costs. That pumped muni annual volume to an all-time high of $430 billion in 2010. At the same time, Wall Street analyst Meredith Whitney warned the market was in for an unprecedented deluge of bond defaults.

John Hallacy, municipal research strategist at BofA Merrill Lynch, attributed the market's performance turn around to a combination of muni supply being at an 11-year low so far this year and eased concerns about a credit meltdown.

"The talking heads talking down munis -- they created a lot of fear that really softened the retail bid. But retail has
come roaring back," he said.

A key for muni performance for the rest of the year is supply, according to Hallacy.

"If it does ramp up, you have to find a home for that paper," he said.

Meanwhile, prices of tax-exempt bonds ended unchanged on Tuesday as the market returned from the July 4 holiday, according to Municipal Market Data, a Thomson Reuters unit.

Yields on top-rated 10-year munis remained at 2.76 percent, while 30-year yields stayed at 4.36 percent on MMD's benchmark triple-A scale.

(Reporting by Karen Pierog; Editing by Andrew Hay)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[NWBrunette]

09:58 AM on 07/06/2011

Oh oh, more good economic news. The waackadoodles, corporatists and baggers have their work cut out for them to keep the economy in the doldrums through next November.

[Peanut Santiago]

09:24 AM on 07/06/2011

?????

More and more cities and towns are in bad shape.
They have shortfalls of property tax and other income and are in financial trouble.
Many are laying off city employees, cutting services, etc.

With so many cities having a hard time budgeting AND it is getting worse, then why would municipal bond markets be doing so well?

Something just ain't kosher......

[CPA 4 Life]

11:36 PM on 07/05/2011

This is rubbish. Dead-cat bounce after the flood of BABs in Q4 softened total returns on munis. More government intervention (BABs) distorting markets. Of course if you do not even know what BABs are (99% of the HP audience) you will believe that the article is highlighting a meaningful trend.

[Muhtadi]

03:55 AM on 07/06/2011

Hey CPA.. though I am with ya on many things you say (as is the case with most logical people whom have ACTUAL “real world” experience in fiscally related matters of life) … I don’t however agree with you that the recent muni rally can be akin to a good old fashion cat bouncing. I think those are reserved mainly for traded equities ?– remember, bonds are cash streams, so, the lower to the floor that price goes the thicker the wallet of the falling cat gets… smart investors will eventually reach out and grab these poor (soul-less lol) creatures (and their fat wallets) before they hit the ground . That upward momentum which we have all recently witnessed (and topic of this article, based on facts, not “rubbish”) is the effect of investors swooping them back up into their arms.- not them bouncing off the ground.

Yes, like all government “plans” the (BABS) created an artificial bubble…but with only less than 2 years in existence ( they came out just as the credit markets were defrosting and capital started flowing again if my memory serves fyi),,, BABS just opened the window to buy tax-exempts cheap and closed end BAB funds at 8.5+%

[Tom95134]

10:05 PM on 07/05/2011

WHERE ARE THE JOBS?

[mandalay007]

11:10 PM on 07/05/2011

No worries, I am sure alllll the municipalities will just be hiring away as we alll sing "we're in th' money"--------(I assume you read my sarcasm on this one_

[Kenz300]

09:06 PM on 07/05/2011

Every one is trying to de-leverage. Banks, municipalities, individuals, the federal government, countries (like Greece)...... we are all worried about debt and are trying to figure out how to reduce it. Everyone has suddenly realized that you can not live beyond your means.