U.S. municipal bond prices fell for a fifth straight day on Friday as individual investors worried about shaky government finances pulled money from the tax-free market.
For the third time in as many months, munis are caught up in a sell-off that has sharply increased tax-free interest rates and lifted borrowing costs for local governments considering issuing new bonds.
"The psychology has certainly turned negative to say the least," said Brian Musielak, senior portfolio manager on the Commerce Bank National Tax-Free Intermediate Fund.
Prices of AAA-rated munis slipped enough in light trading to lift yields by as much as 10 basis points, according to a preliminary reading by Municipal Market Data. Price declines were largest in intermediate maturities, MMD said.
Declines on Thursday had lifted yields on AAA-rated 30-year munis to 5.01 percent, a near two-year high, and spurred comparisons between the yields on some munis issuers and sovereign credits such as Mexico and Colombia.
A California bond with a 6 percent coupon and due November 2039 traded to yield 6.05 percent on Friday, compared with a Mexico bond due in January 2040 and carrying a 6.05 percent coupon quoted at a price yielding 5.75/5.71 percent, according to Evan Rourke, portfolio manager at Eaton Vance Management in New York.
Bid-wanted lists offering muni bonds for sale were numerous and included large ones from The Vanguard Group and Franklin Templeton Group, according to market sources. Representatives of the mutual fund houses were not immediately available.
AAA-rated muni yields, and fatter ones on lower-rated issues, would soon pull in non-traditional buyers because relative values of tax-free yields were growing increasingly attractive, some investors said.
As of Thursday, the yield on a top-rated 30-year muni was 111.6 percent that of a comparable U.S. Treasury bond, according to MMD computations. The relative yields for 20-years was 114.6 percent and 101.5 percent for 10-year bonds.
Municipals strategist John Hallacy and other analysts at Bank of America Merrill Lynch said in a commentary the 30-year muni-Treasury ratio was unlikely to go above 115 percent in selling they largely attribute to technical imbalances.
"There are pockets of opportunity for the long-term oriented investor," Hugh McGurik, head of the municipal bond group at T. Rowe Price, said. "You can buy a AAA Harvard 30-year bond at 5.0 percent today, and that's a taxable equivalent of around 8 percent. That (yield) would have made an awful lot of people happy in the past decade."
America's $2.8 trillion tax-free market has lost ground steadily since November. In late 2010, it posted its worst quarterly return since the first quarter of 1994, while Wall Street equities scored strong gains that are luring many of the small investors who hold three-quarters of munis.
Closed-end municipal bond funds were hit hard on the New York Stock Exchange, where many funds trade. A total of 137 issues were hitting 52-week lows on the NYSE; less than 10 of them were not closed-end muni funds.
"I have some things out and I am not getting as many bids as I would have liked," said Gary Pollack, head of fixed income trading at Deutsche Bank Private Banking in New York. "But the market's still functioning."
The jump in interest rates forced New Jersey to slash a big bond sale this week by $600 million and seems to be discouraging new deals. Thomson Reuters forecast on Friday that muni bond sales next week were expected to dwindle to $3.5 billion from this week's initially forecast $5.1 billion.
"There's an imbalance between supply and demand, especially at the long end," Pollack said. "With Build America Bonds no longer available, the supply of traditional munis there is going to increase while demand is weakening."
A fresh sign of that weakness came with a new report on cash flows at muni bond mutual funds, which are big buyers of long-term tax-free debt.
After Thursday's market close, LipperFMI said U.S. municipal bond funds had reported $1.51 billion of net outflows in the week ended Jan. 12, a decrease from the previous week's outflows of $1.69 billion. But the tally was the ninth consecutive week of mostly sizable net outflows.
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