Dec. 31 (Bloomberg) -- Municipal bonds ended 2011 with yields near the lowest in 44 years as demand for the tax-exempt securities surged, predictions of widespread default never materialized and issuance fell from 2010.
The yield on 20-year general-obligation bonds with an average Moody’s Investors Service rating of Aa2, the third- highest, fell to 3.88 percent in the week ended Dec. 29, according to a Bond Buyer index. Yields dipped to 3.82 percent in October 2010, the lowest since 1967, when Lyndon Baines Johnson was president.
“You had a huge dichotomy in terms of selling at the beginning of the year and buying, starting around April,” Hardy Manges, head of municipal trading at Mitsubishi UFJ Securities in New York, said in a telephone interview. “In the middle of all this, you had a low absolute amount of paper being created in new issuance, and a global flight to safety in Treasuries.”
Bank analyst Meredith Whitney’s prediction in December 2010 of “hundreds of billions of dollars” of defaults proved false. Missed bond payments unrelated to tax-exempt debt in AMR Corp.’s bankruptcy fell to $2.6 billion from about $2.8 billion in 2010, according to Matt Fabian, an analyst at Concord, Massachusetts- based Municipal Market Advisors Inc.
Instead, the $3.7 trillion municipal-bond market returned more than 10 percent, the best since 2009, and outperformed Treasuries, corporate debt, commodities and stocks.
Next Year Awaits
The yield on top-rated 10-year municipal bonds fell to 1.78 percent at 2 p.m. yesterday New York time, a record low, according to the three years of Bloomberg Valuation Index data. That’s down from 3.08 percent on the last day of 2010, according to data compiled by Bloomberg.
They will begin 2012 on a five-week rally, with yields reaching record lows, according to a Bloomberg Valuation Index. U.S. municipal-bond mutual funds have added assets for four straight weeks, including about $1 billion in the week that ended Dec. 7, the most since March 2010. Inflows to funds signal increased demand.
Meanwhile, about $315 million worth of new bonds was sold this week, the lowest since January 2008, according to data compiled by Bloomberg.
Total municipal debt issued this year dropped to $342 billion from $492 billion in 2010, according to the Securities Industry and Financial Markets Association. The taxable Build America Bonds Program ended Dec. 31 last year.
Issuance is projected to rise to $402 billion in 2012, a SIFMA survey of 14 municipal underwriters and dealers said.
Top-rated 10-year bonds plunged 49 basis points in August, the biggest monthly drop since at least January 2009, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
That same month, 10-year U.S. Treasuries fell the most since November 2008, according to Bloomberg Bond Trader prices. Standard & Poor’s downgraded the U.S. to AA+ from AAA on Aug. 5.
Still, investors found a haven in Treasuries as Europe struggled to contain its debt crisis. Yields on the 10-year debt are poised to decline for the fifth month in six, data compiled by Bloomberg show.
--Editors: Stephen Merelman, William Glasgall
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