Municipal bond yields as tracked by The Bond Buyer 20 weekly index of 20-year general obligation yields slid 1 basis point to 4.18%. That's the lowest level since Oct. 8. It continues a year in which yields on municipal bonds and all bonds have slid while bond values have risen. Yields and bond prices move inversely. While bond sales dropped in the past week, 2009 is stil shaping up to be a much more active year for munis than 2008. According to data compiled by Bloomberg, municipal issuers sold $367.7 billion of bonds excluding variable-rate securities this year through last week. That's 32% more than they did in the comparable period last year.
A big trend in muni finance has been the rise of the taxable muni bond, led by the Build America Bonds. In 2009, taxable bonds represented 21% of munis sold compared with just 5% last year.
The decline in yield has sent bond prices soaring. The BofA Merrill Lynch Municipal Master Index, which includes price gains and reinvested interest, has risen 14.6%. Investors are hungry for tax free funds and at the same time municipalities are borrowing more and more using taxable securities lke Build America Bonds.
It will be interesting to see what happens next year as municipal finances continue to deterioarate. Municipalities will need to continue borrowing and will they do it with BABs or stick with tax-advantaged bonds? The other big question is what the government plans to do with the BAB program. Will it continue the generous subsidy it provides to municipalities or scale the program back?
And with tax hikes all but inevitable to finance the growing deficit, what will happen to investor demand for tax-advantaged municipals?
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