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June 22, 2021
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Yield-Starved Buyers Snap Up Muni Bonds

Buyers in quest of larger returns and decrease taxes are scooping up debt offered by state and native governments, pushing borrowing prices to near-record lows and boosting coffers from California to Connecticut.

Buyers have poured a internet $39 billion into municipal-bond mutual funds this yr by means of Thursday, in line with information compiled by Municipal Market Analytics, essentially the most over the identical interval since 2008. Returns on the debt, which native governments use to fund public works equivalent to sewers or bridges, have overwhelmed these of company bonds and Treasurys.

Demand is so intense that Illinois, the one state to faucet the Federal Reserve’s pandemic emergency-lending facility, just lately offered three-year bonds at yields close to 1%. One other enhance is coming from the Biden administration’s proposed tax adjustments, which doubtlessly could make municipal debt extra enticing to traders. Thought-about virtually as protected as Treasurys as a result of they’re backed by taxes or funds on important companies like water, municipal bonds sometimes provide curiosity funds which might be tax-free.

The furor marks a reversal from the pandemic’s lows. Within the spring of 2020, cash-hungry traders dumped even protected munis at steep reductions. Many predicted tax collections would plunge and mounting monetary misery would spur a wave of defaults. Metropolis and state borrowing froze. Defaults did climb, however traders began to return after actions by the Federal Reserve that April—together with chopping rates of interest and shopping for billions value of bonds—buoyed the municipal-debt market and the economic system. Tax collections exceeded expectations, state and native governments lifted income forecasts for this yr and stimulus cash from the federal authorities started flooding in.

Financial institution of America analysts in a current observe mentioned the municipal market is coming into “a brand new golden decade of robust progress and strengthening credit score high quality.” Moody’s Buyers Service raised its outlook for state and native governments to “secure” from “destructive” after the passage of the $1.9 trillion pandemic reduction invoice in March, saying the funds would stabilize state funds and assist keep away from funding cuts for native governments.

Buyers will get a contemporary have a look at the energy of the economic system’s reopening this week after Friday’s disappointing jobs report, parsing earnings from

Walt Disney Co.

DIS 1.68%

and supply service

DoorDash Inc.,

DASH 1.73%

together with new information on shopper costs and retail gross sales. The Dow Jones Industrial Common ended Friday at a brand new excessive.

Municipal bonds held up higher than different fixed-income belongings throughout the broader bond-market decline earlier this yr. Munis returned 0.59% to traders this yr by means of Might 6, counting value adjustments and curiosity funds, beating a minus 3.22% whole return on Treasurys and minus 3.1% on company bonds, in line with Bloomberg Barclays information. Riskier high-yield munis have returned 3.87% over the identical interval, forward of the two.15% return on junk bonds from U.S. firms.

“We made it by means of a tricky yr with very minor issues,” mentioned

Dan Solender,

director of tax-free fixed-income investments at Lord Abbett & Co.

One issue driving current positive aspects, in line with some analysts: State and native governments can’t promote bonds quick sufficient for traders. Bond gross sales have elevated thus far this yr in contrast with the identical interval in 2020, when state and native governments offered essentially the most bonds in a decade in an effort to handle pandemic prices.

Debtors have offered $124 billion in new bonds this yr as of Friday, in line with Municipal Market Analytics. In the meantime, refinancings and cash paid again to traders totaled round $131 billion. That has led to a $7 billion mismatch, growing demand for brand spanking new bonds.

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“We’ve got cash raining out of the sky,” mentioned

Ben Watkins,

director of bond finance for the state of Florida, referring to the favorable market situations and stimulus support. “We’re in a significantly better place now than if Covid hadn’t hit in any respect.”

Each state and native governments promoting debt in current months acquired favorable phrases. Illinois saved thousands and thousands of {dollars} in mid-March when it borrowed $1.26 billion. That included bonds due in 2024 offered at a 1.09% yield, beneath the three.42% that the state is paying on similar-dated debt held by the Fed after it tapped the central financial institution’s pandemic backstop program.

A $34 million Illinois bond rated triple-B minus—on the backside of investment-grade—and due in 10 years just lately traded for round 128 cents on the greenback, in line with information from Digital Municipal Market Entry. It yielded 1.86%, down from 2.22% when issued in March.

“There are simply much more lenders than there are debtors,” mentioned

Matt Fabian,

head of analysis at Municipal Market Analytics. “That retains municipal-bond yields pinned as little as you’ll be able to go.”


‘There are simply much more lenders than there are debtors.’


— Matt Fabian of Municipal Market Analytics

The typical yield on 10-year triple-A-rated munis was 0.82% at Friday’s shut, in line with Bloomberg Barclays information. That’s lower than 0.2 proportion level above the report low yield of 0.68% from February, in information going again to 1993. Yields fall when bond costs rise.

Whereas proposed federal infrastructure spending might ease the jam by placing native coverage makers in higher place to situation extra muni bonds for different initiatives, many count on new demand for munis from rich households if the Biden administration’s plan to lift capital-gains taxes advances in Congress. In a report back to shoppers final week, analysts at UBS really helpful that traders’ take into account shopping for munis over company bonds as one technique to scale back taxable revenue. Adjustments to the tax code in recent times have lower down on different fashionable methods to restrict taxable revenue, equivalent to caps on state and native deductions.

Yields on 10-year triple-A-rated munis are at present round half of these on 10-year Treasury charges. Munis sometimes yield lower than federal debt due to the tax benefit they supply. The present low cost exceeds historic ranges, an indication of traders’ hearty urge for food for the debt.

Such low yields restrict the quantity of revenue that traders can earn from holding muni funds after accounting for charges, mentioned Mr. Fabian. This could drive some traders into cheaper options or out of the market totally. In a booming economic system, traders are likely to favor riskier belongings equivalent to shares over bonds’ fastened yields.

Jim Holihan,

portfolio supervisor at Evercore Wealth Administration, mentioned he favors munis with short-term maturities. Partially, that is to restrict the sensitivity of his traders’ holdings to will increase in rates of interest and inflation, which erode the worth of bonds’ fastened funds.

“It’s a robust time for traders,” he mentioned.

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com

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