US bond market to fall further
Barring an unforeseen turnaround in the final weeks of 2013, municipal bonds will po st their first negative annual performance since the financial crisis began, with investors fleeing municipal funds at a record pace and the market’s overall size, now less than $3.7 trillion, contracting for a third straight year.
Analysts, portfolio managers, and traders say concerns about the Federal Reserve scaling back its massive stimulus, and about the financial soundness of state and local governments, will keep hitting the market at least through the first half of next year. They expect debt issuance to fall further and investors to continue exiting bond funds.
Municipal bond yields shot up this year on the Federal Reserve’s talk about tapering its monthly purchases of treasuries and mortgage-backed securities, news of Detroit’s bankruptcy filing, and Puerto Rico’s budget woes. Demand plummeted as investors moved into more promising equities. Supply followed, with outstanding municipal debt hitting its lowest level in nearly four years.
“Altogether, 2014 will likely be another down year for munis,” said Thomas Weyl of Barclays Capital. “As we contemplate the taper and rising interest rates, as well as continued municipal mutual fund outflows... it is hard to see the light at the end of the tunnel.”
Total municipal issuance will likely tumble to $349.5bn (€254bn) in 2014 from the $366.1bn it projects for this year, according to a recent survey by Securities Industry and Financial Markets Association, one of several forecasts for a drop in bond sales.
Rising yields have ended the savings issuers could reap through refinancing existing bonds. Sales of refunding bonds are running 30% lower than last year and depressing total issuance, according to Reuters.
In fact, sales may not even meet projections for 2013.
As of Friday, total issuance for the year was $303.66bn and sales are only expected to reach $2.5bn next week.
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