(Bloomberg News) Miller Tabak Asset Management and Deutsche Bank AG's U.S. wealth-management group are buying municipal securities, signaling that the $2.9 trillion market's worst slide in at least two years may be nearing an end.
Interest rates on top-rated tax-exempt debt due in 10 years climbed to the most since August yesterday. They were as much as 123 percent above those on similar-maturity Treasuries, the highest since April 2009, according to data compiled by Bloomberg. The ratio has increased as issuers such as the Oklahoma Turnpike Authority borrow $8.7 billion this week, the busiest period since December.
"There's a very good opportunity to take advantage of two markets which have gotten out of tilt from each other," said Gary Pollack, head of fixed-income trading in New York at the private wealth-management arm of Deutsche Bank. The unit of Germany's largest lender oversees $12 billion in debt.
Pollack said in a telephone interview that he sold 10-year Treasuries this week to buy general-obligation bonds. He declined to say how much he purchased. Philadelphia-based Janney Montgomery Scott LLC, which manages $11.8 billion in fixed income, said in an Oct. 5 report that it saw "opportunity knocking" in the rising ratio, which has eclipsed its historical average.
Investors are finding value in tax-free debt as Treasury rates have dropped since the Federal Reserve said last month it would buy more long-term securities to push down mortgage and other loan rates. Seven straight quarters of year-over-year improvement in state and local-government tax revenue are also spurring confidence that municipal defaults, which are running at about a quarter of last year's rate, won't accelerate.
"The low default rate and fiscally responsible behavior on the part of state and local governments support the strong potential for municipal outperformance" as the supply of new bonds diminishes later this year, Peter DeGroot, a strategist at JPMorgan Chase & Co., wrote in a research note yesterday.
From 2001 through 2007, 10-year tax-exempt yields averaged 86 percent of rates on Treasuries, interest from which is taxable, Bloomberg data show.
The ratio soared to 194 percent by December 2008 as investors fled to government securities following Lehman Brothers Holdings' bankruptcy filing three months earlier. It didn't fall below 100 percent again until the following May. The current stretch of five straight weeks of readings at 100 percent or above is the longest since early 2009.
This Week's Slide
As debt offerings picked up this week, 10-year tax-exempt yields increased about 34 basis points, the biggest four-day jump in at least two years, to 2.45 percent, according to a Bloomberg Valuation index data.
Local-government securities also fell along with Treasuries. Government bonds dropped for a third day as speculation European leaders are stepping up efforts to resolve their debt crisis reduced demand for the safest assets.
The increase in municipal rates offers more yield and makes tax-exempt securities cheap compared with Treasuries, said Michael Pietronico, who manages $590 million as chief executive officer at Miller Tabak Asset Management in New York. He bought municipal bonds on Oct. 5 and Oct. 6, he said in a telephone interview.
"This opens an opportunity for investors to jump in at excellent relative-value levels," he said.
Spur to Refunding
Less than three weeks ago, the 10-year tax-exempt yield had dropped below 2 percent, the lowest since at least January 2009, when the BVAL index begins. Signs the economic rebound is flagging combined with concern about the European debt crisis helped drive 10-year Treasury yields to as low as 1.67 percent last month, the lowest level since at least January 1962.
Falling rates have spurred states and localities to refinance and decrease their interest payments. Municipalities refunded $36 billion from July through September, the most in a third-quarter since 2008, Bloomberg data show.
The municipal to Treasury ratio will fall to the 90 percent range or lower once the pace of municipal sales slows, Alan Schankel, director of fixed-income research for Janney, said in a telephone interview.
"If supply moderated we'd go lower," he said. I don't see it dropping below 100 percent in the coming weeks.''
States and local governments are set to sell $10.6 billion of debt in the next 30 days, the smallest scheduled amount in close to two weeks, according to Bloomberg data.
Pollack said he plans to unwind his trade, selling the municipal debt he bought this week, once tax-free yields drop below Treasury rates. That may happen by January when issuance tends to lessen, Pollack said.
"By the beginning of 2012, we'll be able to turn this trade around and make some money," he said.
Following are descriptions of pending sales of municipal debt:
NEW YORK LIBERTY DEVELOPMENT CORP. plans to sell $2.9 billion of refunding bonds, according to preliminary offering statements issued yesterday. The transaction includes $2.59 billion for refunding the debt on World Trade Center towers 2, 3, and 4 and a reoffering of $338 million of revenue bonds for construction of tower 3. Goldman Sachs Group Inc. will lead the sale. (Added Oct. 7)
NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY, which finances capital projects for the most-populous U.S. city, plans to sell $750 million of subordinate revenue debt next week to convert variable-rate bonds into fixed-rate securities and refund debt. The authority's subordinate debt is rated AAA, the highest grade by Standard & Poor's. Bank of America Merrill Lynch is senior manager of the sale. (Added Oct. 6)
CHICAGO BOARD OF EDUCATION, which finances school construction for the third-largest public-education system in the U.S., plans to sell as soon as Oct. 12 about $398 million of general-obligation bonds secured with dedicated revenue. Proceeds will renovate school buildings and finance expansion. Jefferies & Co. will lead a syndicate of banks on the deal. (Updated Oct. 6)
HUDSON YARDS INFRASTRUCTURE CORP., which finances development of a district west of Midtown Manhattan, plans to sell $1 billion of bonds as soon as next week to help pay for extending the No. 7 subway line to the neighborhood. The sale is rated A2, Moody's Investors Service's sixth-highest grade. JPMorgan Chase & Co. will lead a group of banks on the transaction. (Added Oct. 7)
COLORADO HEALTH FACILITIES AUTHORITY, which issues debt on behalf of hospitals in the state, will sell as soon as next week $309 million of revenue bonds. The proceeds will finance capital projects for Catholic Health Initiatives, part of the CHI Credit Group, a multistate health-care provider. The sale is rated AA, S&P's third-highest grade. JPMorgan will underwrite the deal. (Added Oct. 7)