YOU ARE HERE: LAT HomeCollections

Municipal bond yields rise as market rally stalls

February 04, 2011|By Tom Petruno, Los Angeles Times

The municipal bond market's recent rally has run out of steam this week, as some potential buyers apparently don't see current tax-free yields as high enough to compensate for the risks.

The annualized tax-free yield on the Bond Buyer newspaper's index of 40 long-term muni issues nationwide rose to 5.76% on Thursday, up from 5.73% on Wednesday and 5.71% on Tuesday.

Until this week the yield had been sliding since Jan. 18, when it reached a two-year high of 5.95%.

It's not helping the muni market this week that U.S. Treasury bond yields have been rising, reacting in part to strong economic data. The 10-year T-note yield hit 3.55% on Thursday, up from 3.37% on Monday and the highest since May.

The muni market suffered a vicious sell-off beginning in late October, first as investors shied away from bonds in general, then as worries mounted about the strained finances of many state and local governments. As bond prices fall, yields rise.

Investors' fears were fanned by Wall Street banking analyst Meredith Whitney, who warned in late December that "hundreds of billions of dollars" in muni bonds would default in 2011. Historically, muni defaults have been relatively rare.

Whitney has been attacked by many muni market pros who say that her default predictions are vastly overstated and that she triggered needless panic among some muni investors.

In an interview with Bloomberg News this week Whitney said she didn't have specific numbers to back up her default estimate. "Quantifying is a guesstimate at this point," she said. "I was giving an approximation of a magnitude that will bear out to be correct."

Even as muni investors continue to seek to discredit Whitney, muni mutual funds still are suffering cash outflows as sellers outnumber buyers. Net redemptions totaled $2.7 billion in the seven days that ended Jan. 26, down from $5.7 billion the previous week but still the 12th straight week of net withdrawals, according to the Investment Company Institute.

The funds, which owned $473 billion of munis at year-end, normally provide crucial long-term support for the $2.9-trillion market. As investors pull their money, fund managers can be forced to sell bonds to raise cash, dumping more securities into a market still struggling to find buyers.

Despite lucrative yields on munis compared with other bonds, "there's not a lot of excitement for them, though there should be," said George Strickland, a veteran muni fund manager at Thornburg Investment Management in Santa Fe, N.M.

Los Angeles Times Articles