Municipal Bond Market Rallies, No Near Term Reversal in Sight

Bond prices rose during the month and bond yields declined from March end of month levels. The 10 year taxable Treasury bond ended the month yielding approximately 1.95%. The price rally was particularly felt in the non-taxable municipal bond sector. A manageable new issue supply was easily absorbed by available cash balances, as well as new funds available from both maturing/called bonds and recent mutual fund inflows. It does not appear this rally will reverse itself in the near term. 

Despite April’s bond market bullishness, the U.S. sold $16 billion in TIPS at a NEGATIVE 1.08% yield. This underscores the widely held belief of many investors that consumer prices will eventually rise.

Low issuance trend likely to continue in 2012, maintaining yields 

Municipal bond refinancings year to date have increased substantially from 2011 levels while new money issuance remains low as state and local governments continue to pare back capital projects. Net new issuance of municipal bonds in 2011 was negative by approximately $50 billion and it appears this trend will continue in 2012. The persistence of this dynamic will serve to help maintain bond yields in current range levels – absent a shift upward in Treasury bond yields or new and expanded municipal bond default and bankruptcy situations. 

States’ revenue collections exceeded pre-recession levels for the first time

The Nelson A. Rockefeller Institute of Government reported states collected more quarterly tax revenue during the fourth quarter of 2011 than they collected one year earlier. This is the first time states’ revenue collections exceeded collection levels prior to the recession. The fourth quarter 2011 collections were approximately 3% higher than an earlier fourth quarter peak in 2007.

Over the last five years states have reduced spending by more than $290 billion, with fiscal year 2012 cuts alone totaling $140 billion according to data compiled by the Center on Budget and Policy Priorities. Most states are now drafting or approving 2013 budgets and it appears this budget cutting trend will continue for many of them.

Please contact your Investment Specialist if you have any questions on these latest market developments.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
May 3, 2012