Munis offers ‘Oasis’ as debt beats bond peers in volatile stretch

(Bloomberg) – US state and city debt is proving to be a safe haven from the turmoil that has rocked fixed-income securities lately, analysts at the municipal bond market’s biggest underwriter say.

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“As macro market liquidity grows increasingly acute, it doesn’t seem like it’s for the munis,” Bank of America Corp strategists wrote. led by Yingchen Li and Ian Rogow in a research note published Friday. “The light show and growing interest from retailers make munis an oasis.”

Munis has gained about 0.9% this month, while US Treasuries have lost 1.2% and investment-grade corporate bonds have fallen 1.5%, according to data from the Bloomberg index. until Friday. This outperformance holds for all of 2022, amid a brutal year for the bond market as the Federal Reserve raises interest rates to tame inflation.

Bank of America attributes the outperformance to a favorable supply and demand landscape. With borrowing costs soaring, munis issuance is down 18% from last year’s pace, according to data compiled by Bloomberg.

“Consistently lighter-than-expected new issue volume offset the impact of mutual fund outflows,” the analysts wrote. “Retail investors, on the other hand, seem to appreciate the current higher tax-exempt yield levels and view munis as an area with lower volatility” compared to taxable bonds or stocks.

Read Bloomberg Intelligence’s analysis: Municipalities ignore the fact that the battle against inflation is still raging

Bond investors absorbed more volatility to start the week. Treasuries rose to start on Monday, following gains on British debt, as more unfunded tax cuts by British Prime Minister Liz Truss were reversed. Yields on 10-year Treasuries hit their highest level since 2008 last week after stronger-than-expected inflation data boosted expectations of another massive Fed hike at the U.S. meeting. officials next month.

But the munis performed relatively well. Benchmark 10-year municipal bonds are yielding around 79% of comparable-maturity Treasuries, not far off the lows so far this year. The lower this ratio, a key measure of relative value, the more expensive the munis are in comparison.

According to Bank of America analysis, the munis do well during the latter stages of Fed policy tightening, particularly between the second-to-last and last rate hike in a cycle.

“If history repeats this cycle again (which we have every reason to believe), then the period after the December 14 Fed meeting should once again prove to be a strong period for muni yields. “

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