For most sellers in municipal bond markets, the past few weeks have been grim.
Precipitated by fears of monoline downgrades (and in three cases, actual monoline downgrades) yields rocketed, muni bond hedge funds collapsed, and new issues stalled.
But swift and fickle is the market. There’s something of a u-turn going on.
With big institutional heavyweights like Pimco wading in, yields are starting to fall fast. Bill Gross has mentioned the attractiveness of muni bonds, as have others.
But the big surprise, says Accrued Interest is that the muni bond rally may be more than just a fleeting rebound. Not only are institutional vultures homing in, but so too are the smaller retail investors - absent from the market for some months now. Citi’s retail brokerage arm, Smith Barney had its best muni selling day ever on Monday, according to rumour.
A litmus test for the changed environment this week was the placement of a $1.7bn bond from the State of California, unwrapped. Says Accrued Interest:
Demand was so strong that the underwriter cut the interest rate by 15bps across the board, and still $1 billion of the deal was done retail. Now maybe there has been $1 billion of a deal done retail in the past, but I sure as hell don’t remember ever hearing of such a thing.
On a tangent, how well does this rally bode for those betting on a more long term decline in munis? Viz. Andrew Lahde.
Related Links
Municipal bond yields at historic highs - FT
