By Richard J. Bucenec
The Daily Record Newswire
The municipal market has seen its ups and downs so far this year. While lofty expectations for municipal market performance went unmet in June, the months of July and August delivered strong gains.
The large reinvestment dollars (of municipal bond coupon payments) the market had anticipated in June finally came to fruition in July and August. With the bad or uneasy news of sovereign debt defaults hitting the media, many municipal credits came under scrutiny, leaving many investors scared of long-term maturities in the municipal market.
A majority of the reinvestment dollars flowed into the short and intermediate parts of the yield curve, pushing yields to historic lows throughout the first 11 years and steepening the AAA yield curve by eight basis points between two and 30 years. As we entered July, the municipal-to-Treasury yield ratios for two, five, 10 and 30 years rose to 80 percent, 85 percent, 94 percent and 104 percent, respectively. Increased investor demand for munis over the course of the month caused those percentages to decline to 67 percent, 81 percent, 88 percent and 100 percent respectively by month end.
Municipal issuance for the month was light at $27.4 billion, of which $20.5 billion was in the tax-exempt market and approximately $6.9 billion was in taxable Build America Bonds (BABs).
At the end of July, a smaller jobs bill was introduced into the House and reiterated Democrats’ desire to extend the Build America Bonds for two years with lower subsidies.
State cuts in municipal aid, combined with generally weak economic conditions, will likely result in more job losses at the local government level. According to a report issued by the National League of Cities, the National Association of Counties and the US Conference of Mayors, local government jobs losses in fiscal year 2011 and 2012 will approach 500,000, with public safety, public works, public health, social services and parks and recreation being hardest hit by the cutbacks. Do you think municipalities are coming the realization that they have no other alternatives but to cutback?
California remains the only state without an approved budget for the fiscal year 2011 (Which began July 1st for most states). Democratic leaders plan to unveil a budget proposal to erase $19.1 billion deficit that may include a 1 percent rise in personal income-tax rate. Trying to make it more palatable to voters, California’s highest-in-the-nation sales tax would be cut simultaneously by 2.5 percent. The proposed swap could add as much as $3 billion to the general fund.
Like California, Illinois is challenged to close its structural deficits. The gubernatorial race is making it difficult to achieve a political consensus on an income-tax hike.
New York State finally approved its fiscal year budget on Aug. 3, four months after the April start date. The passage of almost $1 billion in new taxes and fees was the last action required to close the state’s $9.2 billion gap. The budget also contains over $5 billion in spending cuts, particularly in health and medical services as well as local aid.
When it’s all said and done, it is imperative to diversify your assets. Regardless if it’s in municipal bonds, domestic stocks, international stocks, taxable bonds, etc, remember to spread your risk over many asset classes.
Richard J. Bucenec is a vice president for Karpus Investment Management in Pittsford, New York. He can be reached at (585) 586-4680 and e-mail rich@karpus.com.
