Muni Bond Markets Rally to Highest Level in 6 Months

Rally comes at a time of extremely low supply of newly issued municipal bonds

Municipal bonds hit a positive milestone Monday, with yields on some bonds retreating to levels not seen since the market began selling off sharply in November.

The Wall Street Journalreports yields for a benchmark of triple-A 10-year municipal bonds fell to 2.62% on Monday. Citing Thomson Reuters Municipal Market Data, the paper notes it’s their lowest level since Nov. 10, around the time the selloff began. Yields move opposite to price.

The rally in municipal bonds has been a welcome one for the $2.9 trillion market. As investor confidence in municipal bonds fell, mutual funds focusing on municipal bonds have seen 26 consecutive weeks of outflows totaling $35 billion, according to Lipper FMI, a unit of Thomson Reuters.

However, The Journal notes that as muni-bond indexes have been flat or higher for 24 consecutive trading days, back to April 12, net withdrawals declined to $95 million last week, according to Lipper, the smallest single-week outflow recorded in the past six months. At the same time, key derivatives indexes that track the cost of insuring municipal bonds have improved.

The rally hasn't aided longer-term 30-year muni bonds as much as shorter-dated bonds. Yields on 30-year bonds stood at 4.36% Monday, according to MMD, down from 4.85% in April and a peak this year of 5.08% in January. But it is still above the levels of early November. That could pose continued problems for states and municipalities seeking to fund longer-term projects.

Also, the paper notes, the rally has come at a time of extremely low supply of newly issued municipal bonds, a dearth that has helped boost the price of existing bonds. It remains unclear whether prices would again begin to fall if issuance were to return to more-robust levels.

A flood of issuance may not be a near-term concern, however, as analysts continue to revise downward their forecasts for 2011 bond issuance. Average weekly issuance so far this year has been $3 billion, according to MMD. That compares with about $8 billion a week in 2010.

Total muni-bond issuance last week reached $5.2 billion, making it the second-most active week in the past five months, according to J.P. Morgan Chase & Co.

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