Tuesday, May 17, 2011

So Much For the Municipal Bond Collapse

From the WSJ:

Municipal bonds hit a positive milestone Monday, with yields on some bonds retreating to levels not seen since the market began selling off sharply in November.

Yields for a benchmark of triple-A 10-year municipal bonds fell to 2.62% on Monday, according to Thomson Reuters Municipal Market Data, their lowest level since Nov. 10, around the time the selloff began. Yields move opposite to price.

The rally in municipal bonds has been a welcome one for the $2.9 trillion market. As investor confidence in municipal bonds fell, mutual funds focusing on municipal bonds have seen 26 consecutive weeks of outflows totaling $35 billion, according to Lipper FMI, a unit of Thomson Reuters.

But as muni-bond indexes have been flat or higher for 24 consecutive trading days, back to April 12, net withdrawals declined to $95 million last week, according to Lipper, the smallest single-week outflow recorded in the past six months. At the same time, key derivatives indexes that track the cost of insuring municipal bonds have improved.

The rally hasn't aided longer-term 30-year muni bonds as much as shorter-dated bonds. Yields on 30-year bonds stood at 4.36% Monday, according to MMD, down from 4.85% in April and a peak this year of 5.08% in January. But it is still above the levels of early November. That could pose continued problems for states and municipalities seeking to fund longer-term projects.