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Municipal debt has been a surprise performer so far this year, earning 5% compared to last years 2.9% loss. But all good things must come to an end, and for munis, that time is now. According to Mikhail Foux, credit analyst at Citigroup.
With benchmark yields setting 10-month lows, municipal bonds are close to the costliest relative to Treasuries since January 2013. Foux told Bloomberg’s Brian Chappatta.
“You just cannot find a lot of value in munis at current levels, while you could see a meaningful move higher in yields,” Foux said. “All the gains you’ll have this year, you’ve had already, and you’ll probably give some of them back.”
And Foux is not alone in his thinking, Chris Alwine at Vanguard Group Inc., Hugh McGuirk at T. Rowe Price Group Inc. and John Dillon at Morgan Stanley Wealth Management all concur with his view that interest rates for munis and other fixed-income assets will rise as the economy recovers.
Muni mutual funds saw $311 million of inflows in the week through Dec. 12, 2012, when tax-free yields fell to the lowest level since 1965. The following week, investors yanked $2.3 billion, the largest outflow in 23 months. Interest rates haven’t returned to their lows since.
“The investor mentality is like the herd mentality — people typically like to buy when prices are high and sell when prices are low, and that’s what we have right now,” Foux said. “I don’t think there’s a lot more juice in munis.”
Todays Other Top Stories
Bloomberg: – Illinois issues $750 million of bonds in third sale of 2014. – Illinois, the lowest-rated U.S. state, issued $750 million of tax-exempt bonds in its third general-obligation sale of 2014.
Businessweek: – Paulson as cheerleader for Puerto Rico plans for wealthy influx. – The billionaire hedge-fund manager has bought municipal debt of the commonwealth, invested in its hotels and is building a vacation home in one of its most exclusive resorts. Paulson’s firm is working on 10 real estate deals in the territory known for its low taxes, according to Alberto Baco Bague, secretary of economic development and commerce for Puerto Rico.
Cate Long: – Puerto Rico’s electricity monopoly is worth half its debt. – There is a reason that the uninsured revenue bonds of Puerto Rico’s electricity monopoly, known as “Prepa,” have been trading around 60 cents on the dollar. The utility is only worth about half of its 6.9 billion of long-term debt.
LearnBonds: – 7 of the most reliable dividend paying stocks. – In this post, I want to make a case for the dividend tortoises instead of the rabbits. I’m talking about seven companies that have such a long history of dividend payments and are so financially solid that they are unlikely to cancel their dividends.
All Star Charts: – Bond market in disagreement with stock market. – One of the things that we like to look at to get a gauge of the risk appetite out there is a ratio between High-Yield (Junk) Bonds and US Treasury Bonds. If money wants to go to work into risk assets like the US Stock Market, it makes sense that we would see similar action in the bond market. If money is flowing faster into risky Junk rather than the safer Treasuries, then we know that the behavior of the bond market is confirming the new highs in the stock market.
Businessweek: – Treasury long bond’s record year-to-date return four times S&P. – A rally in 30-year Treasuries has pushed returns past 10 percent in 2014, the best start to a year in at least two and a half decades.
CNBC: – U.S. bonds supported by Ukraine-Russia turmoil. – U.S. bonds rose on Friday, as resurging tensions in Ukraine boosted investors’ bids for “safe-haven” assets. Yields on 10-year Treasury notes – used to calculate mortgage rates and other consumer loans – fell to 2.668 percent. German Bunds, which are also viewed as a “safe” asset class, rose too.
MarketWatch: – Treasurys eye fourth day of gains on Ukraine. – Treasury prices gained Friday, on track for their fourth consecutive day of advances, as investors continued to fret about escalating violence in Ukraine.
FT: – Low Treasury yields frustrate bond bears. – While many expect a pickup in US economic activity in the second half, Treasury rates remain low – a conundrum that frustrates bearish bond investors who believe 2014 is the year of much higher yields.
WSJ: – Big banks see Treasury scaling back on shorter-dated bonds. – Big banks expect the U.S. Treasury to scale back the amount of shorter-dated bonds it issues, as a shrinking budget deficit means the federal government needs to borrow less in the current fiscal year.
CTS: – U.S. corporate bond chatter: Supply rises but data dampens mood. – The pace of new investment-grade corporate debt offerings raced into higher gear, as issuers Wednesday continued to take advantage of still-ultra low U.S. interest rates.
MoneyBeat: – Corporate bonds poised for a better-than-expected year. – Barclays said on Friday it is now forecasting that bonds from U.S. investment-grade firms will return 1.50 to 2.00 percentage points more than benchmark U.S. Treasury debt, up from the 1.25 to 1.75 forecast they made in December.
Vienna Capitalist: – Marty Fridson at the Grants Investment Conference on the next junk bond implosion. – Long-time credit market observer, Marty Fridson, gave an interesting speech at the bi-annual Grant’s investment conference in NY. In the speech he used a few landmark historic data points in order to arrive at a spectacular prediction for a cataclysmic default wave. He predicted that as much as 1.6 trillion of leveraged loans and junk bonds could default from 2016 to 2020!
Income Investing: – Fitch sees interest-rate volatility as top junk-bond risk. – Fitch Ratings says that while the junk-bond market at times looks a bit frothy lately, we’re not yet a credit cycle peak, and Fitch “does not expect a significant breakdown in credit discipline among U.S. speculative grade issuers despite current high issuance volumes and historically low yields.” Fitch says this in its “Annual Manual” (it rhymes!) leveraged finance market primer, which aims to quantify major risk factors and opportunities in the leveraged finance sector.
IFR: – Bonds top loans in leverage debt rivalry. – French cable company Numericable is the latest company raising leveraged debt in the US to boost high-yield bonds at the expense of leveraged loans. The move, which highlights the strength of the bond market, is a blow for loan investors who have been crying out for paper to invest in.
ETF.com: – 2 Ways to tap emerging debt: EMB Vs. ELD. – Investors have been slowly returning to emerging market debt funds, looking for value opportunities in a segment that was largely shunned in 2013 amid depreciating local currencies and various rate hikes in many of those markets. But when it comes to owning foreign bonds, it makes a difference whether the debt is dollar denominated or not.
Reuters: – Investors crossing back to emerging debt from high yield. – Investors are switching their attention back to developing countries’ debt after flirting with U.S. and European junk bonds during a year of turbulence in emerging markets.
FundWeb: – Emerging market bond managers start to outdo equity rivals. – Emerging market bond funds are outperforming their peers who are investing in the stockmarket as fund managers start to see value in some parts of the sector.
Eaton Vance: – Careful investors may still find opportunities. – With market expectations that the Fed will raise U.S. interest rates sooner rather than later and increased geopolitical unrest around the globe, many investors are shying away from emerging markets. But careful investors may still find extra yield in these markets and an opportunity to diversify away from U.S. interest-rate risk.
Bloomberg View: – Hunt for exotic yield is dangerous. – Recent credit windfalls, smack of desperation among investors. Tortured by low interest rates, they are snapping up increasingly exotic and risky securities in the hunt for returns in a trend that is quite simply dangerous. Cheap credit is inspiring the same kind of financial creativity that led to the 2008 crisis.
Businessweek: – Being wrong on long bonds cost buyers up to 30% this year. – Last year’s concern that interest rates would rise sent buyers into shorter-term debt, which has resulted in meager gains in 2014. Treasuries maturing in one year to three years have returned 0.2 percent this year, Bank of America Merrill Lynch index data show. Now, investors are capitulating to the idea that rates may stay low for much longer.
St Louis Post Dispatch: – Buy stocks, says a bond man. – Scott Colbert helps run $18 billion in investors’ money as director of fixed income investing at Commerce Bank’s trust operation. He also runs the Commerce Bond Fund, which has consistently beaten the bond market.
Reuters: – Bond funds worldwide attract $3.3 billion over week. – Fund investors worldwide poured $3.3 billion into bond funds in the week ended April 23, marking the seventh straight week of inflows into the funds, data from a Bank of America Merrill Lynch Global Research report showed on Friday.
McClellan: – Bond CEF Update: Liquidity is plentiful. – Back in September 2013, I was calling attention to the liquidity problems to which bond-related closed end funds (CEFs) were alerting us. The financial markets got over those liquidity problems, and now the message is that liquidity is very strong. The stock market should be the ongoing beneficiary of that strong liquidity, for as long as it lasts.
#Muniland offerings are exempt from SEC registration so begs question if issuer communication exempt from SEC social media guidelines.
— Cate Long (@cate_long) April 25, 2014
long end leading, spus down, Urkraine hot, strong 5/10/30 fly, like shorting 5/10s for now. Spu bounce at 63? I am out
— Colin Cody (@ColinACody) April 25, 2014
Bloomberg Municipal Markets reports #muniland rally near end, quoting Citi, Morgan Stanley.
— William Glasgall (@WGlasgall) April 25, 2014