Bloomberg News

Muni Rally Drives Yields Near Record Low Amid Slumping Supply

February 02, 2012

Feb. 1 (Bloomberg) -- Municipal bonds rallied for a fifth- straight day, the most this year, driving 10-year yields near record lows amid scarce supply and rising demand for the securities from mutual funds.

The yield on top-rated tax-exempt bonds maturing in 10 years fell 2.2 basis points to 1.77 percent at 3 p.m. in New York, according to a Bloomberg Valuation Index. On Jan. 19, the rate touched 1.75 percent, the lowest since Bloomberg began compiling the data in January 2009. A basis point is 0.01 percentage point.

“You have money coming in and you have investors who have to put the money to work,” Jason Hannon, a trader at New York- based Arbor Research & Trading Inc., said in a telephone interview. “Couple that with lighter-than-expected supply, and that’s going to act as a driver to keep the yields low.”

The amount of local-government debt scheduled for sale in the next 30 days dropped to $6.27 billion today, about $1 billion less than the average from the past 12 months, according to data compiled by Bloomberg.

Mutual funds that focus on U.S. municipal bonds received about $513 million in net additions in the week ended Jan. 25, according to Lipper US Fund Flows data. It was the eighth- straight week of gains, the longest stretch of increases since November 2010, the data show.

Investors are poised to collect $31.6 billion this month from coupon and principal payments on municipal securities, up from about $30 billion in January, Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets in New York, said by e-mail.

Municipal-bond yields fell as 10-year Treasuries snapped a five-session rally today as U.S. manufacturing expanded in January at the fastest pace since June, curbing demand for the safety of government debt. Yields rose 4 basis points to 1.84 percent at 3:44 p.m. in New York, up from an almost four-month low yesterday, according to a Bloomberg index.

--Editors: Ted Bunker, Pete Young.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

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


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