Muni bond sell-off may be easing


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The municipal bond market may be trying to stabilize after the beating it has taken over the last three months.

Share prices of some popular muni mutual funds were little changed Tuesday after last week’s slide, suggesting that the pressure to mark bond prices lower -- and yields higher -- was easing.


The BlackRock National Municipal fund held steady at $9.48 a share after eight straight declines through Friday that had hacked 3.8% off the shares.

The share price of the Franklin California Tax-Free Income fund rose for the first time since Dec. 21, adding 1 cent to $6.49. The Franklin fund’s stock price has tumbled 10.5% since Aug. 31.

The annualized tax-free yield on the Bond Buyer index of 40 long-term muni bonds nationwide rose to a two-year high of 5.95% on Tuesday from 5.93% on Friday, but the increase was the smallest since Jan. 4.

With tax-free yields on many long-term muni bonds nearing or exceeding yields on taxable securities of the same maturities, opportunistic investors normally would be flocking to munis.

Annualized yields on 30-year California state general obligation bonds (charted at left), for example, have been above 6% since last week. By contrast, a 30-year U.S. Treasury bond pays 4.56%.

“At some point these absolute muni yields are going to draw investors,” said Hugh McGuirk, head of muni bonds at mutual fund firm T. Rowe Price in Baltimore.


But potential buyers have been put off, understandably, by the speed of the market’s decline. Munis first began to sell off with bonds in general in November, but since then they’ve been hammered by worries over the grim budget choices facing many deficit-ridden states and municipalities in 2011.

As I noted in my weekend column in The Times, some conservative groups in Washington are pushing for Congress to allow states to file for bankruptcy -- even though not a single state has asked for the legislation.

Public-sector labor unions say bankruptcy advocates are trying to bludgeon labor into surrendering some chunk of their members’ pension and healthcare benefits.

The risk for muni bargain-hunters is that the headlines about state and local government finances aren’t likely to get much better in the near term, even if actual bond defaults remain relatively rare. High fear levels could keep downward pressure on bond prices, particularly if muni mutual funds continue to suffer redemptions (forcing fund managers to sell bonds).

The muni market has long been dominated by buy-and-hold investors. It needs them now more than ever.

-- Tom Petruno



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