Second Quarter 2009 Tax-Exempt Muni Bond Market Review
July 15, 2009
Author(s):
First Quarter 2009 Fixed Income Sector Returns (Pre-Tax)*
First Quarter 2009 Fixed Income Return Per Unit of Duration*
*As of 06/30/09. Source: Barclays Capital
The municipal bond market is staging a rebound so far in 2009 after suffering through one of the most challenging periods since the Great Depression. Increased retail investment, solid price performance, helpful government intervention, and a thaw in the market for new issuances are the main areas of improvement experienced so far this year. Through the first six months of 2009, retail open-end municipal bond mutual fund inflows have been more than twice the amount experienced during the same period last year, and individual purchases of municipal bonds have been extremely strong as investors look to the municipal bond market for principal protection and income exempt from taxes. The market continues to be buoyed by the Build America Bond (BABs) program. After factoring in the 35% interest cost subsidy to the issuer, the cost of capital for deals issued to date has been well below what the issuers would have paid in the tax-exempt marketplace. The general effect of this program has been an overall improvement in the price of most high quality municipal bonds. New issue supply, while below the amount issued through the first half of 2008, is up significantly from issuance levels seen at the end of 2008, as investors are more willing to own municipal bonds and issuers are finding the cost of capital to be acceptable compared to late 2008. However, growing concerns surrounding the fiscal challenges facing all municipalities could derail these areas of improvement, especially if economic conditions worsen or fail to improve in the near term.
Investors will be closely monitoring the financial health of municipal issuers as they struggle with lower income and sales tax receipts. According to the Nelson A. Rockefeller Institute of Government, U.S. states’ tax collections dropped by 26 percent during the first four months of 2009 compared to the same period last year, as the worsening recession impacted employment and consumer spending. Alabama, North Dakota and Utah were the only states of the 37 listed in the report to show an increase in tax revenue. Many observers expect municipal revenue collections to deteriorate further as municipal credits generally lag the economy by several quarters after a recession ends. Declining revenues will cause municipalities to consider difficult budgets cuts while looking for ways to increase revenue, which will most likely be in the form of higher taxes.
Past performance is no guarantee of future results. Indices are gross of fees and are not available for direct investment. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
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