July marked the third straight month of declines for munis, the longest slide since the month after Whitney made the forecast on CBS Corp.’s “60 Minutes.”
“The effect of these negative headlines on the muni market should not be ignored,” Dan Toboja, vice president of muni trading at Ziegler Capital Markets in Chicago, said in an e- mail. “Traditional individual buyers of muni funds invest for peace of mind. If munis appear to have even marginally more risk the buyer base shrinks.”
The higher yields may pull some individual investors back into the market.
Benchmark tax-exempt munis maturing in 10 years have a taxable-equivalent yield of 4.82 percent. That compares with an interest rate of about 2.6 percent on similar-maturity Treasuries.
“I don’t believe Detroit means the entire muni sector is in disarray,” said David Kotok, chief investment officer at Sarasota, Florida-based Cumberland Advisors Inc., which oversees about $2.2 billion of munis. When yields on tax-exempt local debt exceed those on federal securities, “the tax-free muni is a terrific buy,” he said in an interview.
Cash Ahead
Muni investors will receive $36 billion in August from coupon, redemption and principal payments, according to Chris Mauro, head of muni strategy at RBC Capital Markets in New York. That dwarfs the $12 billion in debt that states and cities are set to sell over the next 30 days, data compiled by Bloomberg show.
CNA Financial Corp., the insurance unit of Loews Corp., said it added local debt after the decline. CNA held munis that cost $10.1 billion as of June 30. Chief Financial Officer Craig Mense on a July 29 conference call said the market presented “attractive yield opportunities.”
Past performance suggests buyers such as CNA Financial will be rewarded with gains in August. State and city bonds have had positive returns every August since 2008, Bank of America data show.
2003 Precedent