Municipal bond yield levels ended December and the year at the lowest nominal levels in several decades.
Elements of confusion
In December of 1981, I completed the first year of my nascent municipal bond career somewhat confused by 12% taxable money market rates and near 12% non-taxable 20-year, “AA” rated bond yields.
Last week, with 30 years of bond market experience behind me, I reflected on the significance to you, our clients, of money market rates near zero, 2% taxable 10-year U.S. government bond yields and mid-maturity, non-taxable bond yields flirting with a 2% handle. My experiences aside, elements of confusion remain. I have many thoughts on the topic and will share some with you in our upcoming January “Year in Review” publication.
Demand surging into the new year, then supply
The month of December saw a surge in demand for municipal bonds coupled with a paltry (by historical standards) supply. We look for this dynamic to continue into the early part of 2012, keeping municipal bond rates at or near current levels. New issue supply will increase in 2012 from 2011 levels, but we do not expect the supply surge to occur until later in the year.
2011 municipal bond returns beat most stock indices
Mid and longer duration municipal bond portfolio returns in 2011 were solid and beat most stock indices on a nominal, pre-income tax basis. For taxpayers in a 28-35% federal income tax bracket, the effective, after-tax returns for most portfolios were excellent. It is unrealistic to expect similar returns from these same portfolios in 2012.
Eight straight quarters of tax revenue growth
State and local governments received some good news in December with the release of the Q3 statistic that tax revenues rose 4.1% in the quarter – making for eight consecutive quarterly gains in this category. Additionally, the gain was driven by increases in property, sales and personal income taxes. This eases, somewhat, the pressure on budgets of state and local governments for now.
Good news for the municipal bond market and a nice way to start 2012.
On behalf of everyone at Bernardi Securities, Inc., thank you for your continued confidence and we wish you a happy and healthy 2012.
Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
January 3, 2012