"I've worked in this business for more than 20 years and ratios getting north of 100% of Treasuries happens infrequently, and doesn't usually last too long," said Robert Millikan, who helps oversee $19 billion as executive director of Sterling Capital Management Llc in Raleigh, N.C.
Fixed-income strategists at New York-based JPMorgan Chase & Co. said in a report dated Nov. 19 that they raised their recommendation on tax-exempt munis to "cautiously positive" from "neutral." They said all bonds of all maturities are "relatively cheap."
The relationship between municipal and government debt has been distorted by Fed efforts to sustain growth after the recession ended last year. The central bank has kept its target rate for overnight loans between banks in a record low range of zero to 0.25% since December 2008 and began spending $600 billion to buy Treasuries on Nov. 12 in its second round of so- called quantitative easing.
Sales Accelerate
State and local governments issued $351.7 billion in debt this year, on pace for the most since Bloomberg began keeping records in 2004.
Sales were boosted by the Build America Bond program, an initiative of President Barack Obama that pays state and local issuers a 35% subsidy of interest expense when they issue taxable debt. More than $92 billion of the securities have been sold this year, or 26.2% of the total. In the six years through 2008, taxable securities comprised 5%. The program expires Dec. 31.
Municipal bonds have lost favor as state and local governments face a record $18.5 billion in budget deficits this year, according to a National Governors Association survey. While the U.S. economy is recovering, more than half the states have run out of money in unemployment trust funds, financed by payroll taxes, with the U.S. jobless rate holding above 9%. States have borrowed $40.9 billion from the federal government.
Alarm Bells
Harrisburg, the capital of Pennsylvania, is struggling to avoid bankruptcy, and a South Carolina toll road defaulted on its debt. Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.'s dividend cut in 2008, said in September that the U.S. government will face pressure to bail out struggling states in the next 12 months, joining investor Warren Buffett in raising the alarm about the potential for widespread defaults in the $2.8 trillion municipal bond market.
Investors withdrew $3 billion from open-end municipal bond mutual funds in the week ended Nov. 17, the most in almost 19 years, according to Lipper FMI.