Muni yields climb
The municipal bond market is stumbling as investors turn more cautious while states and local governments ramp up borrowing.
Tax-free yields on muni bonds rose Wednesday, continuing a reversal that began about two weeks ago. California state bonds were hit particularly hard. And Los Angeles County paid double the interest rate it expected as it raised more than $1 billion by selling short-term notes.
The market’s demand for higher yields is pushing down prices of older fixed-rate bonds, depressing share values of muni bond mutual funds.
The share price of the Franklin California Tax-Free Income fund slipped 3 cents, or 0.5%, to $6.54 on Wednesday. The fund is down 2.7% since May 22 -- a relatively modest decline so far.
The annualized yield on the Bond Buyer index of 40 long-term muni bonds nationwide rose to 5.54% on Wednesday from 5.51% on Tuesday. It has risen from 5.22% on May 21.
The muni market’s sudden troubles, after a strong rally for much of the spring, in part reflect a surge in U.S. Treasury bond rates: As those yields rise they’re putting upward pressure on other interest rates.
A heavy supply of new muni bonds also is weighing on the market, giving buyers the upper hand. About $12 billion in new muni issues are expected to be sold this week, the most since the end of April.
For the California muni market there’s another issue: As the state’s budget woes have deepened in recent weeks the market has begun to focus more intently on the potential fallout. Although Wall Street doesn’t believe the state could renege on its debts, investors have begun to demand much higher yields on California’s general obligation bonds to reflect the greater perceived risk of financial calamity.
The yield on 10-year California state bonds soared to 4.89% on Wednesday from 4.76% on Tuesday, according to Bloomberg News data. The yield was 4.37% four weeks ago.
“The whole muni market has gotten hurt, but California is leading the parade,” said Stephen Kelleher, manager of the muni bond unit at brokerage Wedbush Morgan Securities.
The state’s budget mess forced L.A. County on Wednesday to pay much more interest than planned on $1.3 billion in short-term notes routinely sold at this time of year to tide the county over until expected tax payments come in.
The county paid an annualized yield of 0.8% on the notes, Assistant Treasurer Glenn Byers said. It had expected to pay as little as 0.4%.
Investors demanded a higher rate after Standard & Poor’s cut its rating on the notes one notch, to SP-1 from SP-1-plus, citing uncertainty about the effect of possible state welfare-funding cuts on the county’s budget.
Those worries weren’t shared by Moody’s Investors Service, which affirmed its highest rating on the notes. But given the market’s dour mood at the moment, “We paid a heavy penalty for not having the highest ratings” from both of the rating firms, Byers said.
Orange County, with top ratings from S&P; and Moody’s, paid 0.4% on a similar but smaller note deal Wednesday.
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