For the last several weeks, munis have actually been rallying.
Citi’s George Friedlander lays out four reasons
- First and foremost, better-quality munis had simply gotten too cheap, with market pressures indiscriminately taking yields higher across the credit spectrum. Since then, the market has begun to get more selective, with better-quality paper outperforming on the back of very solid demand from “crossover” buyers — institutional investors who bought munis for a total return opportunity, despite a limited ability or an inability to benefit from the tax exemption.
- Secondly, pressures generated by muni bond fund outflows appear to have begun to abate, although the Lipper/AMG Data numbers remain quite negative (see “Demand Patterns,” below).
- Thirdly, new issue supply has remained extremely soft, with total issuance through 2/28 at a paltry $28.6 billion, down 52.0%, and tax-exempt issuance at $22.5 billion, down 43.7% (see “Supply Patterns,” below).
- Finally, it appears that some of the most extreme credit fears have subsided, despite the continuing “noise” regarding state and local near- and long-term budgetary pressures.
Here’s a look at muni fund flows: