Bloomberg News

Investment in Local Governments Hits One-Year High: Muni Credit

October 04, 2011

Oct. 4 (Bloomberg) -- Investors seeking higher yields are pouring the most money into U.S. municipal-bond mutual funds in a year, signaling growing demand for the estimated $75 billion that states and cities may borrow by year-end.

Yields on tax-exempt bonds maturing in 10 years have surpassed rates on similarly maturing Treasuries for five consecutive weeks, the longest stretch since April 2009, according to data compiled by Bloomberg.

Individuals put $1.9 billion into tax-exempt funds in September, the biggest monthly inflow since September 2010 when $2.6 billion was added, according to Lipper US Fund Flows. Investors withdrew about $4 billion from stock mutual funds in the first three weeks of September after a $29.3 billion outflow in August, according to the Investment Company Institute, a Washington-based trade group. The Standard & Poor’s 500 Index lost 7.2 percent in September.

“After an exhausting month of stock-market volatility, people turned to municipals,” Tom Dalpiaz, who oversees $280 million as senior vice president at Monument, Colorado-based Advisors Assets Management Inc, said in a telephone interview.

Municipal yields on top-rated 10-year bonds were 2.27 percent yesterday, compared with 1.76 percent on Treasuries. They have been at or above 100 percent of 10-year federal bond yields since Aug. 29.

Fund investors are also being attracted by a decline in municipal defaults this year to about $1.1 billion, a quarter of last year’s total, according to Bank of America Merrill Lynch.

‘Armageddon’ Didn’t Happen

“They realized that the armageddon of hundreds of billions of defaults wasn’t happening,” Dalpiaz said. “They also did the math and checked the yields and said, ‘I think I can be here,’” he said.

Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008, told the CBS “60 Minutes” show in December that the next 12 months would see “hundreds of billions of dollars” of defaults.

Municipalities refinancing securities will help drive monthly tax-exempt sales to about $25 billion for the rest of 2011, the most since July and up from an earlier projection of $20 billion, Chris Mauro, a municipal-debt investment strategist for RBC Capital Markets in New York, wrote in a report last month.

Issuance averaged $34 billion a month in 2010, paced by the expiring Build America Bond program with its 35 percent federal interest subsidy, according to Bloomberg data.

“It’s certainly helpful that we’re getting inflows back into the muni market at the same time we’re getting an uptick in issuance,” Mauro said in a telephone interview.

States and municipalities are set to borrow $12 billion during the next 30 days, almost the highest level of future sales since December, according to Bloomberg data.

Following is a description of a pending sale of municipal debt:

PALM BEACH COUNTY SOLID WASTE AUTHORITY, which provides solid waste and recycling services to 1.4 million residents and businesses in the county, plans to sell $600 million of revenue bonds as soon as Oct. 6 to refund debt. The bonds are rated AA+, Standard & Poor’s second-highest grade. Citigroup will lead a syndicate of banks on the transaction. (Updated Oct. 4)

--Editors: Walid El-Gabry, Mark Schoifet

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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