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Exodus from Munis Yields Opportunities

[Until rfj gets his new income-oriented board established, people can post here. Within reason, of course ]

http://online.wsj.com/article/SB118799628206208392.html

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By SHEFALI ANAND and JANE J. KIM
August 25, 2007

One unexpected victim of the bond-market turmoil is the normally placid market for municipal bonds.

Selling by hedge funds and general nervousness by investors drove down the prices of many bonds -- driving up yields, and in the process creating interesting opportunities for investors.

Two of the newest examples: Classic muni bonds and "callable" bonds, the ones that can be paid back early at the issuer's whim. Yields on some of these issues have topped 5% in recent weeks, as investors yanked money out -- pushing down their prices as they scrambled into safer investments like Treasurys.

Because bond yields move in the opposite direction to prices, the exodus is resulting in higher-yielding options for investors willing to swim against the current and snap up the out-of-favor issues.

The benchmark triple-A-rated 30-year municipal bond, as tracked by research firm Thomson Financial/Municipal Market Data, is yielding 4.78%, up 0.71 percentage point since the start of the year. The highest-rated 10-year bond is up about 0.40 percentage point, at a yield of 4.12%.

"There's been no difference in credit quality [of these bonds], just the appetite for risk from investors has gone down," says Dan Solender, director of municipal bond management at Lord Abbett & Co.

Some new muni bonds are coming to market with coupons above 5%, such as 30-year New York Thruway Personal Income Tax revenue bonds at 5.25%. A similar deal would have had a 5% coupon just few months ago, says Bob Nelson of Municipal Market Data.

Because munis can be tax-free, current yields start looking even richer. For instance, the benchmark 30-year bond yields about 7.3% assuming an income-tax rate of 35% [this means it has an after-tax yield equivalent to a fully-taxable bond yielding 7.3%].

Among callable bonds, in recent weeks the difference between their yields and comparable Treasurys has widened to its highest level in three years. In the past week, for example, Prudential Financial Inc. issued 15-year bonds yielding 6.20%, callable in three years.

Etc.
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