Amid the alarmist headlines and hysterical rants, a funny thing is happening in the municipal bond market.
Prices are rising.
As The Wall Street Journal noted, muni yields have been moving lower over the past month, with yields on benchmark 30-year general obligation bonds falling 7% since late January.
That makes sense. As we pointed out last year (“Muni Bond Opportunity Gaining Notice“), the underlying culprits in the muni selloff were technical factors affecting supply and demand. The Build America Bonds program was about to expire and issuers, fearful of missing out on lucrative financing opportunities, flooded the market.
Also affecting the market was a downgrade of tobacco bonds, which then prompted some high-yield muni-bond funds to sell, according to the Journal.
Of course, these factors were conflated with the expected budget challenges faced by state and local governments. Add in the hysterics of a few self-styled gurus and before you know it, headline writers and TV pundits are having a field day.
A more thoughtful analysis, however, reveals a different story.
The Congressional hearings designed to illuminate government budget problems across the country revealed what most serious market followers already knew: The economic downturn hurt state and local governments. They agreed, not surprisingly, that spending must be reduced and unfunded long-term pension liabilities must be addressed.
But they also noted that governments’ fiscal woes are, for the most part, cyclical, and states and municipalities have an array of tools to manage shortfalls. And defaults, already miniscule, actually fell last year. Even a prominent naysayer was quoted recently as saying that if there are some defaults, they would likely be confined to unrated bonds that individual investors seeking safe haven generally avoid anyway.
In other words, there are challenges, but it’s not Armageddon.
Meantime, political leaders have both the will and the public support to address long-simmering financial issues, as evidenced by the intense political wrangling currently underway. From New Jersey to California, budget-busting items that were once taboo are now on the table.
What does this mean for the individual investor?
Yes, yields have declined somewhat, but by any measure, muni bonds are still an incredible value. Look for high quality, long-term bonds at outstanding values that accomplish your goal of generating a steady stream of tax-free income.