Investors Want Municipal Bonds, but Issuance Is Rare
July 18 2019 - 5:59AM
Dow Jones News
By Britton O'Daly
Investors are flooding into municipal bonds, highlighting how a
global bond rally and a lingering slowdown in borrowing by state
and local governments has boosted demand for their debt.
Investors have poured a net $47 billion into municipal bond
funds during the first six months of 2019, a record for the first
two quarters, according to Lipper data from Refinitiv. The bonds
have provided positive returns, including price changes and
interest, on the Bloomberg Barclays Municipal Bond Index every
month since November 2018, the longest streak since the summer of
2016.
The surge in investor demand has met a decline in debt sales by
states and municipalities. The drop was spurred by provisions of
the 2017 tax overhaul that limited alternatives for refinancing,
some state budget officers said. At the same time, recent economic
strength has filled the coffers of state and local governments,
reducing their need to borrow and decreasing the already-low risk
of defaults.
"There are not many munis around," said Guy Davidson, the chief
investment officer of AllianceBernstein LP's municipal business.
And strong balance sheets mean "the downside is pretty limited at
the moment."
Municipal bonds, which fund civic projects ranging from tunnels
to school renovations, are considered almost as safe as U.S.
Treasurys because they are backed by tax revenue or payments from
such essential services as water. They are largely owned by
ordinary investors and have long served as a key component of
retirees' savings because their interest payments are typically
tax-exempt.
The surge in demand further eases worries that the 2017 tax
overhaul would hurt municipal bonds by reducing the appeal of those
tax-free payments. Many also expected the tax cuts to boost growth
and inflation. Investors tend to sell the bonds when they expect
robust growth, while inflation erodes the purchasing power of the
debt's fixed payments.
The yield on the benchmark 10-year Treasury note, which rises as
bond prices fall, hit 3.23% in November. But diminishing growth
expectations and signs the Federal Reserve will shift to cutting
rates have spurred a bond rally this year, driving the 10-year note
yield below 2%. The yield on the Bloomberg Barclays Municipal Bond
Index, an indication of how much it would cost governments to issue
new debt, stood earlier this week at 1.95%, its lowest level since
October 2016, and down from a recent peak of 3.08% in November.
"It's really just amazing how aggressive this market is," said
Matt Fabian, a partner at Municipal Market Analytics. "They want
tax-exempt income, and you can't get that anywhere else except for
the muni market."
The drop in yields has been a boon to state and local
governments. Florida's board of education last week sold a
Aaa-rated 10-year bond at a yield of 1.64%.
Issuance in general has remained low. Municipal bond issuance
slipped about 25% in 2018 and has stayed at modest levels in 2019,
according to data from the Securities Industry and Financial
Markets Association, an industry trade group.
Ben Watkins, director of Florida's division of bond finance,
said a provision in the tax overhaul limited alternatives for
refinancing muni bonds by issuing new debt and that "the only way
we would take advantage of favorable markets and interest rates has
been handcuffed by Congress."
That is likely to keep supply low, even as financial stability
has improved at city and state governments. There were only 40
defaults in 2018, the lowest on record in Municipal Market
Analytics data going back a decade. Mr. Fabian estimated that the
total was probably a "multidecade low."
If municipal finances and demand for the debt remains strong,
low supply could make yields fall even further, according to some
analysts. Still, Mr. Davidson said the municipal bond market
includes numerous everyday investors whose sentiment can "turn on a
dime."
"Demand is not always a given," said Mr. Davidson. "Mom and Pop
are easy to scare."
(END) Dow Jones Newswires
July 18, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.