For muni investors frozen on the sidelines waiting for a spike in yields, it appears that day is not close at hand.
Municipal bond issuance has hit a 13-year low, and there are no signs of the slowdown abating.
So far this year, the supply of munis is 16% below 2013’s pace, according to Bloomberg. Last month, issuance was about $21 billion, the lowest for July since 2001, and analysts expect August to be sluggish as well.
The root of the slowdown can be traced to the 2008 recession and despite a gradual recovery, cities and states are still reluctant to take on new debt.
Appetite trumps fear
Meantime, demand is strong. Market fears over Puerto Rico’s new law allowing public corporations to restructure their debt were blunted by the shortage of municipal bonds and the increase in taxes.
As a result, muni prices have been on the rise every month since the beginning of the year, as investment dollars continue to flood into muni bond funds.
Where does this leave investors?
Unfortunately, some income investors who are still hesitant to jump in because of what they consider to be modest yields and their expectation of a rise in rates, have been missing the forest for the trees.
They are foregoing the steady stream of tax-free income which can be generated today, while there is a good case to be made that muni rates will be heading lower.
Are muni yields really low?
Investor demand should remain strong because after-tax yields – the most important consideration for income investors – are considerably more generous than the yields available in other fixed income markets. “Eye Popping Yields”
For years, “TV gurus” have been unrelenting in their predictions of a rising interest rate environment. And although their pride may be bruised from being on the wrong track for so long, it’s the investors they led astray who continue to pay the price.