Jefferson County Bankruptcy – The bankruptcy of Jefferson County, Alabama, may keep municipal yields that are already high relative to U.S. Treasuries elevated as some investors flee tax- exempt debt, according to Michael Schroeder, president and chief investment officer of Wasmer, Schroeder & Co.
The bankruptcy could spook some buyers after bank analyst Meredith Whitney last year predicted “hundreds of billions of dollars” of defaults in the municipal market, leading to an exodus from tax-exempt funds, Schroeder said. While her prediction failed to materialize, yields have stayed high relative to Treasuries, according to data compiled by Bloomberg.
“It does have some implications on a broader base for the market,” Schroeder, whose Naples, Florida-based firm manages about $3 billion of municipal bonds, said in an interview before the bankruptcy filing. Going back to the concerns Whitney expressed, “it shows how political municipal-credit analysis has become,” he said.
Benchmark municipal bonds have been trading above interest rates on similar-maturity U.S. Treasuries, with 10-year tax- exempt yields at almost 115 percent of those on federal debt, according to data compiled by Bloomberg. The ratio was 119 percent on Nov. 1, down from a 2011 high of 123 percent on Oct. 6, the data show. It has averaged almost 92 percent since 2001.
Dropping YieldsYields on 10-year Treasury notes declined to 1.96 percent today from 2.08 percent yesterday, according to Bloomberg Bond Trader prices.
The yield on 10-year AAA municipal debt was 2.25 percent, down from 2.30 percent yesterday, BVAL data show.
“It’s a negative,” said Alan Schankel, director of fixed- income research for Janney Montgomery Scott LLC in Philadelphia.
“I don’t think it’s a huge negative, but the sheer size and the headline number, about $3 billion in bonds, it can’t help but have some impact. I don’t think it will be huge because this has been going on for a long time.”