Year-End Muni Bond Glut Creates Buying Opportunity

Yields on municipal debt at levels not reached since May

Wealthy U.S. investors may be able to buy municipal bonds at some of the highest yields in seven months as issuers rush to borrow before year end.

Yields on the second-highest-rated municipal debt were at levels not reached since May, according to a Bloomberg Fair Market Value index as of Dec. 6.

The Bloomberg said tax-free securities declined 2.29% last month. That was the third straight monthly drop, which hasn’t happened since 2004.

“There will be opportunities for astute investors to buy good quality bonds at lower prices,” Randy Beeman, managing director of Robert W. Baird & Co.’s The Wise Investor Group, told Bloomberg.

Munis of all maturities are “relatively cheap” right now, with yields in short-to-intermediate term securities particularly high compared with Treasuries, according to fixed- income strategists at New York-based JPMorgan Chase & Co. in a report dated Nov. 19. The bank’s analysts raised their recommendation on tax-exempt munis to “cautiously positive” from “neutral.” Bond yields rise as prices fall.

Prices are lower in part because of a heavy supply of bonds as issuers work to meet the Dec. 31 deadline to receive a 35% federal subsidy through the taxable Build America Bond program, said Richard Saperstein, managing director at Treasury Partners in New York, which oversees $10 billion in assets.

Bloomberg also noted an extension of the Build America Bond program wasn’t included in a compromise that President Barack Obama struck with Rebubican leaders on Monday to prolong tax cuts enacted in 2001 and 2003, according to two White House officials briefed on the plan who spoke on condition of anonymity because the details haven’t been released.

When municipal issuers sell Build America Bonds, the deals are frequently combined with tax-exempt issuance, Saperstein said. States and municipalities borrowed about $39.6 billion last month, according to data compiled by Bloomberg.

Top-rated tax-exempt munis due in 10 years were yielding 2.78% as of Dec. 6, according to a Bloomberg Valuation index. For the highest earners paying a 35% federal rate on income, a 2.78% yield on the securities is equivalent to a 4.28 taxable yield.

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