The tax-exempt market has skidded into a new month, withyields rising slightly over the last two weeks.
Particularly affectedhave been shorter maturity bonds, where individualinvestors have rebuffed too-low absolute yields, and lowerrated/risky sector bonds that have been hampered by worseningcredit fears and a setback in institutional risk taking. Still,there has been little sign of forced selling by large investors,and the Federal government's efforts to support both Citibankand AIG are positives for our sector.
Further, PresidentObama's new budget proposal should underwrite more demandfor tax-exempt bonds by both raising marginal tax ratesand cutting the value of competing tax shelters like the mortgageinterest deduction. This puts the muni sector in a slightlybetter place to receive new sponsorship, especially becauserecent price concessions by sellers have made bonds throughthe 10yr more attractive. Still, this week, any positives maybreak against the largest new issue calendar so far this year,and a potential reinvigoration of flight-to-safety buying ofTreasuries could further dilute institutional demand for munis.
A new month brings uncertainty, but not all the news is bad.
Investors seeking total return should look to shorter maturitybonds; following recent price declines, the 5yr is offering largeconcessions to current buyers. We also exhort more income-orientedbuying of insured, safe-sector loans that have lost investmentgrade ratings. Pre-refunded bonds have better liquidity andnear-term price performance. We also advise generic caution withrespect to health care issuers, but higher yields in this sector arecreating attractive opportunities for selected credits.
Ambac's sharp quarterly loss highlights the challenges for legacyinsurers; MBIA's results are this week. Renewed pleas for a bailoutof MBIA are attracting interest in insured bonds. We cautionagainst performance buying on this kind of speculation. Also, tobaccobonds may face headwinds from declining consumptionand potential new supply; this is not yet a buying opportunity.
Matthew Posner is a director with Municipal Market Advisors. Posner writes intraday research, data and commentary on the municipal market and heads up the firm's efforts in Washington, D.C., as an educator of policy markers on the tax-exempt securities market. Founded in 1995, MMA is the leading independent strategy, research and advisory firm in municipal bond industry.