Prices in the municipal bond market have weakened in the last few weeks, with investors growing shy over very low absolute yields.
With new-issue supply growing, underwriters of new bond sales have seen more risk in being caught with unsold bond proceeds. Thus, new issues last week were priced cheaply to sell quickly, but this forced benchmark muni bonds and statement evaluations cheaper, as well.
While our market still lacks persistent demand from institutional buyers -- so yields may continue to rise in the near term -- these concessions by bond sellers have created the best value in shorter maturity high-grade muni bonds all year. This week, the new issue calendar, at least by the standards of 2009, is substantial, in theory putting pressure on prices, but the rapid evolution of events in the financial markets make performance expectations impossible.
Value has returned to early maturity bonds.
Following recent price declines, the 5-year is offering large concessions to current buyers; we recommend that total return buyers look to buy related high-grade bonds. We also exhort more income-oriented buying of insured, safe-sector loans that have lost investment grade ratings.
Pre-refunded bonds have better liquidity and near-term price performance. We also advise generic caution with respect to health care issuers, but higher yields in this sector are creating attractive opportunities for selected credits.
rating warnings by Moody's make clear the danger in betting that the legacy bond insurers can resurrect their business models -- caution for insured bonds. Similar to Ambac,
4Q08 results also showed large losses and more selling in their own portfolios of muni bonds. We see some risk of more rating warnings for MBIA this week.
Matt Fabian is managing director at Municipal Market Advisors.