Municipal bond investors who parked their funds in money markets awaiting a flood of new issues and soaring interest rates will be disappointed once again next year.
According to a survey of underwriters and dealers, an estimated $275 billion in munis will be issued in 2015, barely up from this year’s $273.5 billion.
The survey was conducted by the Securities Industry and Financial Markets Association.
“We expect municipal issuance to remain mostly flat to up slightly in 2015, with bank lending continuing to provide borrowers with an alternative to public bond issuance,” said Michael Decker, of SIFMA. “On a systemic basis, we expect state and local credit quality to remain strong, although we may see isolated credit events in 2015.”
High demand, low supply
The outlook for next year should come as no surprise. As we pointed out previously (Fewer New Munis), tax hikes have fueled exceptionally strong demand for the after-tax yield of munis.
Additionally, the reticence of state and local governments to issue debt after the 2008 financial crisis has curtailed supply. In fact, recent Fed data shows the municipal bond market has shrunk to its lowest level in five years. In the third quarter of this year, outstanding debt stood at $3.63 trillion, compared with $3.77 trillion in the fourth quarter of 2010, when the muni market peaked.
New norm?
If you’ve been smart enough to ignore the years-long warnings that interest rates are on the verge of dramatically rising, you should continue to do so. Not only is interest-rate prognosticating pointless, but the fundamental assumption by most pundits – that low rates are an aberration – may very well be false.
As some long-time bond professionals told Bloomberg, today’s anemic growth and inflation rates resemble the 50-year period after the Fed was established in 1913, not the past 40 years or so that many analysts use as a barometer of the norm.
All of which raises the question to investors whose funds are parked in money-losing money-market funds: What are you waiting for?
Muni investors don’t need a crystal ball or specialized expertise to succeed, just a good dose of common sense. Above the din, one thing is clear: Investors who haven’t waited on the sidelines can focus on the holiday season and celebrate as their interest clock continues to tick.