(Bloomberg News) Tax-exempt bonds are yielding more than Treasuries for the first time since the financial crisis, a relationship that history shows doesn't last, especially as the Federal Reserve kindles inflation expectations.

Investors buying AAA municipal general obligation bonds due in two years get a yield equal to 119% of similar- maturity Treasuries, Bloomberg Fair Market Value data show. A ratio above 100% means those in the 38.3% federal tax bracket get higher yields plus tax-sheltered income. Before the credit crisis in 2008, that happened twice in the 20 years for shorter-maturity debt.

The combination of worsening state and local finances and a surge in sales that included $15.5 billion of offerings last week, the most in more than seven years, has pushed tax-exempt bond payouts above Treasuries. Muni rates rose faster even as yields on 10-year U.S. notes posted the biggest two-week increase in almost a year on speculation the Fed will avoid deflation by purchasing $600 billion of government debt.

"The value pendulum has swung from Treasuries to munis," said Jonathan Lewis, founding principal of New York-based Samson Capital Advisors LLC, which manages $7.3 billion. "Municipals are a good place to park your money and get a yield advantage that typically wouldn't be there."

Shifting to Munis

Lewis shifted money to Treasuries from munis eight months ago when the ratio dropped to as low as 66% as the Fed finished $1.7 trillion in asset purchases in the first leg of what's become known as quantitative easing.

General obligation notes rated AAA due in two years yield 0.70%, or 0.19 percentage point more than Treasuries. Over the past 20 years, Treasuries have yielded about 1 percentage point more, according to Bloomberg data.

Losses were magnified by the 6.4% average decline in closed-end municipal-bond funds this month through Nov. 18 as concern increased that city and state finances are deteriorating, according to Morningstar. The funds traded at a 0.36% premium to net asset values last week, down from about 0.55% a month earlier, according to Cecilia Gondor, a closed-end fund analyst at Thomas J Herzfeld Advisors Inc. in Miami.

Losses in closed-end funds helped push up rates even on top-rated issues such as Georgia AAA general obligation bonds due in two years to 125% of two-year Treasuries, Bloomberg data show. Maryland National Capital Parks & Planning Commission AAA general obligation bonds due in 2012 yielded as much as 141% of comparable Treasuries last week.

'Relatively Cheap'

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