Munis To The Rescue


As far as equities go, the buyside and sellside dominate the market, moving it where they need it to be on occasion and causing wild gyrations and volatility. In the bond markets, the retail crowd remains an extremely important factor in terms of volume. And nowhere is retail more important than the municipal bond market.

With interest rates lower than ever courtesy of Ben Bernanke, states are eyeing the current environment as a time for both general obligation and revenue muni bonds. Issuance is on the rise and while that bodes well for individual municipalities and their respective state, it does not help bring retail volume back into the market. Yields on short-to-near-term bonds are relatively low with the only “decent” return occurring far out on the curve.

The dry up in liquidity has left some of the dealers with excessive inventory of munis on the short end of the curve. There’s been a large swath of munis hitting the market as some cities, trying to boost their economy and create jobs, do debt offerings for new projects related to parks, universities and entertainment facilities. These revenue bonds are just what the doctor ordered in terms of helping townships grow and flourish, but their low yields will be difficult to justify.

And despite the age of the rating agencies, not all investors are convinced that cities can meet their bond obligations. “There’s value if you go out there looking for it,” noted one fixed-income trader who declined to be named. “You can find a town that’s in need of a debt offering that has, say, an ‘A’ rating and is forced to offer an attractive yield.”

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