Investors hunt for bargains in $4tn US muni market

Bargain hunters tour the US $ 4 billion municipal bond market after a sales frenzy drove prices to record levels and sparked emergency intervention from the US Federal Reserve.

While the coronavirus crisis has created fear in the markets, investors have abandoned all kinds of assets in a desperate search for money. Typical havens such as the Muni bond market, where American states and cities collect money, have not been immune.

Muni’s bond funds recorded a record withdrawal of $ 12.2 billion for the week ending March 18, according to Lipper data. Debt yields maturing in 10 years climbed about 1 percentage point in one week to 2.6%. Yields increase when prices fall.

The selling pressure was so strong that the Fed intervened last Friday, promising to extend a new money market support facility to authorize loans guaranteed by the munis. This marked a real reversal for a market that had experienced extraordinary gains in the past year, as investors sought to generate largely tax-exempt income from a corner of the debt markets that tends to produce little faults.

Now, however, investors say they see opportunities in parts of the Muni market that have been oversold. High-rated bonds maturing in less than 10 years in large states are popular, said the portfolio managers. The same goes for bonds issued by utilities and other organizations with solid sources of income such as water and sewer systems. Investors have also taken a liking to bonds guaranteed by agreements with tobacco companies.

“There are absolutely glaring values ​​in municipal space at this point, provided you have the gut courage to overcome volatility,” Tom McLoughlin told UBS. “You no longer reach the yield. It is offered to you. ”

On Tuesday this week, yields exceeded 7% for Texas bonds maturing in August, according to data collected by the Municipal Securities Rulemaking Board. Bonds had not yielded more than 4 percent before this month. And for the first time, yields on some California bonds maturing in 2035 exceeded 4.5%.

“Daring” investors who “can resist volatility and who [are] not scared off by extreme pricing action “are now putting the money to work,” said Vikram Rai, head of municipal strategy for Citigroup.

The highly rated California and New York bonds, in particular, have sparked investor interest, said Glenn McGowan, director of municipal underwriting at RBC Capital Markets. BlackRock has been among the buyers of these titles for the past few days.

“The Muni market is arguably the cheapest of all when all is said and done,” said Rick Rieder, BlackRock’s chief investment officer for global fixed income, who oversees the $ 2.3 billion bond portfolio. group dollars.

Dan Scholl, head of municipal fixed income securities at the Wilmington Trust, said his business had recovered from debts issued by Wisconsin, Pennsylvania and Maryland, as well as the city of Dallas.

“These are high-quality states that have large cash reserves and the financial flexibility to resist declining revenues,” he said.

Because yields are largely tax-exempt, municipal bonds have historically yielded less than US treasury bills. But this dynamic collapsed, the coronavirus pandemic having shaken the markets. Now that the benchmark 10-year Treasury bill only earns 0.86%, a new breed of buyer is embarking on munitions.

“While many mutual funds and trading accounts continue to face selling pressures, other fund managers, banks and insurance accounts have been buyers of these new returns,” said McGowan.

Yet some debt-bearing investors are cautious given the unprecedented nature of the economic shocks associated with the viral epidemic. Many are concerned about the increasing likelihood of defaults in the coming months. Credit rating agencies have warned that transit agencies from San Francisco to Washington will lose significant revenue due to coronavirus blockages, jeopardizing their ability to repay bonds.

End of last week Fitch downgraded about $ 2.2 billion in debt issued by Suffolk County – an area just outside of New York, which includes the upscale beaches of Hamptons – because the municipality cannot collect taxes with the centers shopping and restaurants closed.

“We have never known such a quick economic breakpoint,” said Matt Buscone, co-director of portfolio management at Breckinridge Capital Advisors. “No one knows if it will be for 30, 60 or 90 days or more, so it’s difficult to determine a price if you don’t know what the income will be.”

For Citi’s Rai, who believes the Fed should go further and include equipped debt in its asset purchase program, volatility should persist as long as Covid-19 spreads.

“As long as we continue to be informed of the growing number of infected people in the United States, there will be pessimism about the financial sector in general,” he warned. “This will reinforce the reluctance of investors to intervene and put money to work.”

Additional reporting by Jennifer Ablan

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