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Investors may still be leery of muni bonds after recent sell-off

October 21, 2009|Tom Petruno

The municipal bond market has stabilized in recent days after a steep, two-week sell-off. A heavy supply of new bonds for sale nationwide this week will show whether tax-free yields have reached levels high enough to lure investors back.

On Tuesday, some large muni bond offerings were scaled back, suggesting that investors remained leery.

Cash poured into muni bonds in August and September as many investors rushed to lock in yields, fed up with near-zero returns on money market mutual funds and other short-term accounts.

But the strong demand for bonds, in pushing up prices of the securities, also pushed down their yields. The annualized tax-free yield on 10-year California general-obligation bonds plunged from 5.25% in late June to less than 4% by early October.

Then the muni market hit a wall, as buyers essentially went on strike. That wreaked havoc with California's attempt to sell $4.5 billion of new bonds the week of Oct. 5. The state was forced to boost yields sharply to get the deal done.

The sell-off in munis nationwide continued through late last week, pushing bond prices down and yields up. The share price of the Vanguard California Long-Term Tax-Exempt muni bond mutual fund slid from a 52-week high of $11.39 on Oct. 5 to $11.12 by Thursday, a loss of 2.4% -- a rude jolt for investors who had forgotten it's possible to lose money in bonds, if just on paper.

But the fund's share price has slipped just 1 cent since Thursday, to $11.11 on Tuesday, a sign that the selling wave has largely abated.

"There's more investor interest with yields up," said Parker Colvin, a muni bond trader at Stone & Youngberg in San Francisco. The yield on 10-year California general-obligation bonds has rebounded to about 4.5%, he said.

Still, some new muni bond offerings Tuesday attracted only modest buying by individual investors. An offering of $820 million of revenue bonds by the California Public Works Board garnered $67 million in orders from individuals, the state treasurer's office said. Most of that deal, however, is being offered exclusively to large investors.

Minnesota reduced a planned sale of $906 million in bonds and Maryland put off selling $600 million in securities to refinance older debt, Bloomberg News reported.

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tom.petruno@latimes.com

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