'Pretty Wide' Spread
"We've been aggressively buying BBBs in the last year-and- a-half because the spread has been pretty wide," he said. "Spreads have come in significantly this year, but we're still adding BBB paper because of where supply and demand are."
Investors have pushed down yields on issuers such as Pittsburgh, with a BBB Standard & Poor's rating. The extra yield on 10-year Pittsburgh bonds relative to top-grade debt fell to about 0.98 percentage point last week, the lowest since it was issued in January, according to Bloomberg data.
Puerto Rico Public Buildings Authority, with a grade in the BBB tier, may get a boost as it plans to sell $500 million of refunding debt as soon as next week, Bloomberg data show.
"High-yield players have money and normally would want to buy a BB credit, but they just aren't out there," said McAllister, who helps manage about $3 billion of munis in Milwaukee. At the same time, "high-grade people are stepping down in credit quality, which creates this convergence in BBB," setting the debt up to rally 0.50 percentage point, he said.
The yield spread on BBBs remains wider than its historical average, giving it room to narrow, Paris said. The gap over AAAs has averaged 0.75 percentage point since 1992, Bloomberg data show. It peaked at 3.57 percentage points in February 2009, four months before the end of the recession.
Municipal debt rated BBB has returned 6.3 percent this year, beating the 2.4 percent gain for AAAs and the 3.9 percent increase for the entire $3.7 trillion municipal market, according to Bank of America data.