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Nosebleed Prices - Wednesday, 01/25/2012

  • Municipal yields decline to all-time lows (higher bond prices)
  • Traders/investors pause to assess value
  • Strong demand likely to hold valuations near current levels

The municipal bond market has been on a seven-week march to all-time low rates (yields), as the chart below shows. Given the voracious appetite that investors have had for munis, I would have expected that the natural order would be for the market to take a pause — even to back-up a bit as investors reassess relative value. Traders have begun to refer to bonds as trading at NOSEBLEED prices, which suggests a market moving too high, too fast.

Is the muni market overbought?  

Perhaps a little, but cash is still flowing into open-end mutual funds, and the forward calendar of new issues coming to market does not yet satisfy the reinvestment demand lurking in the shadows. Despite these nosebleed prices, it appears that investors continue to view munis as a relative value play, given their high level of creditworthiness.

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This table shows the previous, low yields on AAA-rated general obligation municipal bonds since June 1, 1981, and compares them to Friday's (1/20/12) yields:

Muni Bond Yields Hit New Lows  

 Maturity  

Previous Low Since 1981*  

Closing Yield  

1/20/2012  

Comparison 

1 Year 

0.20% on 1/6/12 

0.20% 

SAME

2 Year 

0.30% on 8/11/11 

0.35%     

HIGHER

5 Year 

0.79% on 1/19/12 

0.77% 

LOWER

10 Year 

1.69% on 1/19/12 

1.67% 

LOWER

15 Year 

2.30% on 1/19/12 

2.28% 

LOWER

20 Year 

2.81% on 1/19/12 

2.79% 

LOWER

25 Year 

3.12% on 1/19/12 

3.10% 

LOWER

30 Year 

3.17% on 1/19/12 

3.15% 

LOWER

*Since the 6/1/1981 inception of Thomson Municipal Market Data (MMD). MMD provides a broad range of benchmark data and technical/fundamental analysis to the municipal market. Their analytical services offer a unique perspective on the municipal bond market, highlighting key areas of value and opportunity.

 

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Please note that MUNI NATION is written by Jim Colby and represents his opinions, and these opinions may change at any time and from time to time. MUNI NATION is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. © 2014 Van Eck Securities Corporation. MUNI NATION is a trademark of Van Eck Associates Corporation.

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