The highest yields on 30-year U.S. Treasuries since October erased the extra income advantage investors get from similar-maturity municipal bonds to the least in eight months, suggesting an opportunity to buy.
The highest yields on 30-year U.S. Treasuries since October erased the extra income advantage investors get from similar-maturity municipal bonds to the least in eight months, suggesting an opportunity to buy.
The tax-exempt muni yield was 99.5 percent of federal debt on March 14, the lowest since July 5, before rebounding to about 101 percent yesterday, according to data compiled by Bloomberg. The 30-year U.S. yield has climbed 27 basis points this week as the Federal Reserve improved its assessment of the economy.
The 30-year muni yield has risen 10 basis points this week, bringing the ratio closer to its historical average under 100. It may hover there as Treasury rates increase more than municipal yields, said Gary Pollack, head of fixed-income trading at Deutsche Bank AG's private wealth unit.
“We'll probably be in the 90 to 100 percent range for the time being, which I would consider a more normal relationship,” Pollack said in a telephone interview. His firm in New York oversees $12 billion.
At the current ratio, investors who have been waiting for tax-exempt yields to increase from historic lows should “begin to step in,” said Justin Hoogendoorn, a managing director at BMO Capital Markets in Chicago. “From a longer-term perspective, I like this a whole lot better than a month ago.”
45-Year Low
Yields on 20-year general-obligation bonds fell to 3.6 percent in the week ended Jan. 19, the lowest since 1967, according to a Bond Buyer index. They rose to 3.95 percent this week, the highest since early December. Yields move in the opposite direction of prices.
The monthly average ratio for the 30-year muni and Treasury bonds from 2001 through 2007 was 96 percent, Bloomberg data show. It set a record high of 221 percent in December 2008, two months after Lehman Brothers Holdings Inc. declared bankruptcy.
The ratio reached 137.7 percent Nov. 24, a two-and-a-half- year high, and had been above 100 percent since July 18. That helped munis return 11.2 percent in 2011, more than Treasuries, company debt, commodities and stocks, according to Bank of America Merrill Lynch indexes of prices and coupons.
Municipal bonds have lost 0.87 percent this month through yesterday, putting them on a pace for their worst month since January 2011, when they lost 1 percent.
Climbing Yields
Interest rates on Treasuries due in 30 years have risen about 36 basis points this month, to 3.45 percent, while municipal yields increased 20 basis points to 3.48 percent, the highest since Feb. 10, according to Bloomberg data. A basis point is 0.01 percentage point.
“In the past, Treasury rates moved down faster than muni yields,” Neil Klein, who helps manage $650 million of municipals as senior managing director at Carret Asset management in New York, said in a telephone interview. “Now they've moved up faster than muni yields.”
Municipal bonds historically yield less than Treasuries because their interest payments are exempt from most taxes. An investor in the 35 percent income-tax bracket would have to earn 5.32 percent taxable to match the tax-free 30-year muni yield.
The Fed said March 13 that employment was improving and turmoil in financial markets that drove investors to the safety of U.S. debt had subsided.
--Bloomberg News--
