Even a generic spread analysis tells a similar story. Ten-year Treasuries yielded 51 basis points more than similar maturity munis in mid-January, the most since July. Triple-A corporate bonds yielded 123 basis points more than triple-A munis on Jan. 8, the most since August. The fact that ratios have risen and spreads have narrowed in recent weeks shows munis have underperformed during the coronavirus-inspired risk-off push.
That’s at least some reprieve for a group of investors who haven’t exactly hid their exasperation. “Where’s the point where it stops making sense?” Debra Crovicz, a managing director at Chilton Investment Co., asked Bloomberg News’s Fola Akinnibi and Mallika Mitra. “We have the ability to add some corporate or even add some Treasuries as a placeholder, and that’s actually what we’re doing. I’ve been waiting for the market to give us a chance to buy at more attractive levels.”
As bond investors know all too well, though, waiting can be costly. As I wrote last week, many Wall Street strategists felt that a 1.6% yield on 10-year Treasuries was too low, given the economic backdrop. Yields haven’t managed to climb back to that mark in three trading sessions. So anyone who bought at that level is looking at a profit.
Those who bought munis in January could experience a similar rally beyond expectations. As of now, states and cities are poised to issue $13 billion of debt in the next 30 days. But investors will get back $38 billion in February just from principal and interest payments on bonds they currently own, Bloomberg News’s Martin Z. Braun reported this week, meaning reinvesting that cash would be enough to cover potential supply almost three times over. It’s telling when money managers groan about money: “It’s been really, really difficult.”
Whatever the endgame in the coming months, it probably won’t be pretty for investors. The best-performing part of the tax-free market, unsurprisingly, has been the longest-dated bonds rated below investment grade — in other words, those most sensitive to rising interest rates and most at risk of defaulting if the economic outlook sours. Some investors are trying to lock in better value by ditching tax-exempt debt altogether: Taxable munis returned 4.2% in January, the second-best month dating back to 2011. And benchmark muni yields are just a haven retreat away from 1%, providing lower income streams and a smaller buffer against rising interest rates or inflation.
Of course, the other way to look at this is that states and cities can lock in historically cheap rates for infrastructure projects or for refinancing existing obligations. That matters much more than the federal government’s borrowing costs, given that local officials don’t have the luxury of running budget deficits, huge or otherwise. I’ve even suggested that if used judiciously, shoring up public retirement systems with pension-obligation bonds might make sense for some states with yields this low.
For the health of the market, though, it feels as if munis need a breather. Going this far, this fast, is always risky for an asset class, particularly one that’s proved to be susceptible to small shifts in sentiment. Staying on cruise control would be just fine for investors and issuers alike.
This article was provided by Bloomberg News.