The bond market’s powerful December rally continued unabated into the first month of the year. Bond yields declined to near historic lows in both the U.S. Treasury and municipal bond sectors. The 10-year Treasury yield fell to 1.80% on January 31st versus 3.37% on the same day last year. The 20-year “AAA” rated municipal bond index dropped to 2.72% on the last day of the month versus 4.56% on January 31st last year.
Greece risk, Fed announcement drove rally
The January rally was fueled primarily by the impending and inevitable principal write down for many Greek bondholders and the Federal Reserve’s announcement that it would hold interest rates at exceptionally low levels for at least two years. A generally lackluster economic picture coming out of the holiday season also was a contributing factor to lowering bond yields.
Slight supply increase no match for demand
The supply of new issue municipal bonds increased slightly in January compared to last January’s levels, but was low compared to issuance levels of several years ago – and certainly no match for the increased level of capital flowing into the municipal bond market during the month. Consequently, municipal bond yields declined in January with no significant near term reversal in sight.
Jefferson County debt holders win judgement
The Jefferson County, Alabama situation remains complicated and far from resolved. Alabama federal Judge Thomas Bennett issued a ruling in January agreeing with the county that it should retain control of certain management decisions and limiting the power of the receiver of its sewer system. The Judge did rule favorably for debt holders by ruling the county’s special revenue pledge remains in force and debt service payments will be paid from the system’s net revenues while the bankruptcy case proceeds. He did note he will determine the amount available for debt service payments in a future ruling. The county persists in challenging traditional notions of “net revenues” and is seeking to expand its definition to the detriment of debt holders.
We discussed the potential impact of these two recent rulings in our January 2012 President’s Letter, Back to Municipal Bond Basics.
Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
February 7, 2012