From Dr. Brett Steenbarger’s TraderFeed. When munis paid more than Treasuries a few months ago, it wasn’t because of the perceived risk that municipalities were overstretched and wouldn’t be able to pay the interest and principal on the bonds issued as it is now, especially California. Rather, it was a wholesale jump into Treasuries for safety that depressed their yields.
Ten-year Treasury yields ($TNX, above) have pulled back at the same time that stocks have corrected, as concerns about economic weakness resurface. Note, however, that those yields remain in an uptrend and are significantly above the lows registered in March when quantitative easing led to greatly reduced rate expectations.
Meanwhile, I notice that yields among AAA insured, general obligation municipal bonds have backed up over the past month. Two-year yields moved from .92% to 1.05%; five-year yields from 1.84% to 2.32%; seven-years from 2.37% to 2.87%; and ten-years from 3.13% to 3.59%. While those ten-year muni rates are meaningfully down from 4.4% in December, they are once again close to overtaking the rates on equivalent but taxable Treasuries, as concerns about municipal financing continue. At least one savvy investor, however, thinks that the markets have overreacted to muni risk.
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