When we hear the expression “everything old is new again” we might think of vintage cars, jazz clubs, Betty White, or bell-bottom jeans. This week, it’s the only way to describe our bond market and political climate.
On several occasions during the past year, it seemed that the municipal market had effectively de-coupled from the Treasury market, moving up and down on its own technicals and fundamentals and exhibiting unheard-of ratios that rendered it cheap by more than 30%. But recently, ratios have returned to their historical norms and tax-exempts seem to be moving more in tandem with their Treasury counterparts. Due in part to the Greek parliament’s approval of key austerity measures and better than expected economic indices, both the Treasury market and the municipal market softened for the first four days of last week’s trading session before recovering somewhat on Friday. Neither market, however, traded outside a 5 basis point range.
On Monday, the Obama Administration unveiled its 2013 budget proposals, which included limiting the municipal tax exemption to 28% for higher income investors and re-authorizing a taxable Build America Bonds program. Both of these proposals were floated last year and effectively rejected by the Congress. But by making them new again, the President has stirred up some familiar worries as well as hopes on the part of local governments and investors in top tax brackets. Lobbyists who have been hibernating since the Jobs Bill was rolled out last September are being engaged, and the municipal market is on alert again. We do not see either tax reform or major subsidy programs on the Washington agenda during a presidential election year but will not be surprised by anything that appears on the table next January.
For the week ending February 8, inflows to municipal bond funds remained positive for the tenth straight week at $2.5 billion, bringing the year-to-date total to just over $9 billion. After $6.5 billion of outflows, tax-exempt money market funds took in $1.65 billion during the week ended February 6th. Even though the absolute yield on tax-exempts has not been at its most attractive, inflows and coupon reinvestments since last December have totaled approximately $100 billion. For borrowers, there is simply no better time to raise cash. Yet, this week’s calendar is just under $5 billion, with $1.25 billion for the Baa2/BBB-/BBB rated Puerto Rico Aqueduct and Sewer Authority, $830 million for the New York State Dormitory Authority, and $385 million for the State of Tennessee. In the high yield sector, we await details on a proposed $13 million BB+ Utah charter school financing but otherwise see very little scheduled for negotiated sale.