We’ve been saying for months that municipal bonds are trading at historically low prices and extraordinary yields. Others are taking notice, too.
In its October 20th edition, Barron’s forcefully drives home the point that muni yields have never been this attractive compared with U.S. Treasuries.
The article’s explanation for this phenomenon is also right on the money. As we have explained in previous commentaries, it is not credit quality that is at issue, it is the current lack of liquidity in the marketplace. As Barron’s correctly points out, even during the Great Depression, “overall muni default rates remained very low.”
What has temporarily turned this market upside down is the massive forced selling of highly leveraged hedge funds and mutual funds, creating unprecedented opportunities for individual investors.
As Barron’s notes, a 6.00% yield on a 30-year high quality muni is approximately 135% of the 4.30% yield available on the 30-year Treasury. Prior to this year, long-term munis have traditionally returned less than Treasuries, due to their tax-exempt status.
No one can predict precisely when these markets will return to their historical norm. We can, however, offer these thoughts:
All indications are that the forced selling by hedge funds (de-leveraging) may be abating. Today’s higher yields will attract new investors to municipal bond funds, turning them from sellers into buyers.
The fact that the commodities markets are signaling lower inflation, and tax brackets will almost certainly be higher down the road, leads us to believe that investors who take advantage of today’s extraordinary yields will be very pleased they did.
Others echo Barron’s observations.
Investment U, a special publication by The Oxford Club, ran an article on its Web site recently titled, “Municipal Bonds: A True Once-in-a-Lifetime Opportunity.”
Last week, Bloomberg quoted a Citigroup analyst as saying: “The yields in the municipal bond market have become very compelling. We expect these yield levels to recede dramatically over time, providing the potential for capital gains.”
Most major brokerage firms have made similar observations.
If you don’t want to take their word for it, ask yourself: What other investment can you make today that can promise this kind of after-tax return with a similar degree of safety?
Judging from the enthusiasm of our clients and the traffic on our Web site, many investors have arrived at the same conclusion, even before reading Barron’s.