Pre-Refunded Municipal Bond Interest at Highest Level Since 1990s

Interest in pre-refunded municipal bonds is at the highest level since the early 1990s. For investors, pre-refunded munis offer the opportunity to earn a high return backed by Treasury Bonds.

Interest in pre-refunded municipal bonds is at the highest level since the early 1990s.  For investors, pre-refunded munis offer the opportunity to earn a high return backed by Treasury Bonds.

An article in Marketwatch today points out that:

"Buying interest for these bonds is higher than at any time since the early 1990s, she said.

"The market has been in pretty serious disarray in the past six months and issuers have had to pay fairly high rates," added Cynthia Clemson, co-director of municipal investments at Eaton Vance Corp.  Those issues have a better chance of being refunded once the market settles down, she said.

Ron Schwartz, manager of Ridgeworth Investment Grade Tax Exempt Bond Fund agreed the market is set up nicely for refundings.

"We're buying a lot of bonds we like, but in particular we're buying [issues that are candidates for] refundings," said Schwartz. "

Pre-refunded munis are high rated municipal bonds that will be refinanced once their call date has expired.  To refinance them, municipalities do another bond offering when rates have come down, put the money into Treasuries, and then wait for the call period to arrive.  Before the call period, pre-refunded bonds often yield a higher rate of return than comparable short duration Treasuries against which they are secured.”

Investors often seek to purchase callable municipal bonds that are issued by municipalities at a discount to par if they believe that the municipalities are likely to be able to access capital markets to refinance.  If the municipalities access new capital and prerefund the bonds, the investor earns a windfall. At the moment, analysts believe that a likely candidate for refinancing is a 30-year municipal bond paying between 5.5% to 6.5% with a 10 year call period.  In some cases, these bonds may be called a premium, paying more than their face value.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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