Municipal Bonds New Issue Mirage

Total issuance of new municipal bonds may set a record in 2010, but the real story for investors is the composition of new bond issuance. Wall Street forecasts range from $415 billion to $450 billion in new municipal bond issuance for 2010, with most forecasts clustered towards the upper end of that range.

Municipal Bonds New Issue
Creative Commons License photo credit: whittlz

New municipal bond issuance in 2010 therefore stands a chance to break the 2007 new issue record of $435 billion. Supply is one of the most important drivers of municipal bond performance and manageable supply helped produce good performance in 2009.
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Municipal Bonds on a Roll

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Creative Commons License photo credit: rohank9

Top rated tax-free municipal bond yields did not quite match the decline in Treasury yields in August, but performance was impressive nonetheless and followed a strong month of July.

The favorable supply/demand balance that has aided municipal bonds all year became acute in August. Investor demand intensified while supply decreased further. Investor flows into municipal bond mutual funds continued at a frenetic pace. Through August 26, municipal inflows totaled $46 billion according to AMG data services, more than the full year record of $44 billion recorded in 1993. The supply/demand balance helped push year to-date performance of the Barclays Municipal Bond Index just over 10%.

At the same time, Municipal supply decreased further in August with new issuance 27% behind last year’s pace according to Bloomberg. In August the low supply situation was exacerbated by taxable Build America Bonds (BABs) representing one-third of monthly issuance, the highest percentage of monthly issuance since the BABs program was launched in April of this year and higher than an average of 10% to 20% per month. This left traditional tax-exempt bond investors fewer bonds to pick from at a time when demand remained robust. This powerful one-two combination translated into strong municipal performance.
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Don’t Let Rising Interest Rate Worries Get You Down

This report was prepared by my firm LPL Financial.

Bond investors have always worried about the impact of rising interest rates on their portfolios and rightly so. So, higher yields in the market translate to lower prices for existing holdings and investor worries about rising interest rates. Their worries have increased over the second quarter of 2009. As we
approach the midpoint of the year, many investors are no doubt concerned over the rise in the benchmark 10-year Treasury note yield from 2.2% to 3.5% (through June 29). Worries over higher yields (lower prices) and potential losses may resurface as investors look to the second half of 2009
and beyond.
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Should You Be Buying Municipal Bonds Right Now?

Is now the time to buy Muni bonds?

Is now the time to buy Muni bonds?

This report was prepared by my firm LPL Financial

The municipal market may soon garner negative headlines if an expected large number of states and municipalities announce budget deficits with the July 1 start of their fiscal year. Municipal bond credit quality may therefore come under question, and investors need to be prepared. Budget strains were expected but are becoming more widespread, and none are more high profile than California’s. Last week, State of California general obligation bonds were placed on credit watch for a potential downgrade by all three major rating agencies, citing the lack of a budget resolution.

  • Although news of budget strains may peak over the coming weeks, municipal credit quality questions will likely persist for some time.
  • However, the municipal market has historically held up well in response to credit quality challenges.
  • Municipal bond investors can take preventative measures but should stay the course and use weakness to add to positions.

The Rockefeller Institute of Government, an independent researcher of state and local governments, reported June 18 that states’ personal income tax collections declined by 26 percent during January to April of 2009 versus the same period in 2008. Among the three sources of state revenues, personal income tax, corporate income tax, and sales tax, personal taxes are typically the biggest share of state revenues. Although states and municipalities do their best to forecast revenue shortfalls, mismatches can occur with budget shortfalls as a result.
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