07/05/2011 07:42 pm ET Updated Dec 06, 2017

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

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

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)

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