Investors have been withdrawing money from the municipal bond market over the last month almost as fast as they put it into the market last spring.
Fears that the fiscal cliff negotiations will yield a change in the bonds’ tax-exempt status have yielded the quickest withdrawal rate since 2010. Yields hit lows last week not seen in four decades.
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This week, $2.3 billion exited the market—the largest withdrawal since January 2011. State and local debt has lost 1.9% so far in December.
Municipal bond funds saw 29 consecutive weeks of outflows in 2010 after banking analyst Meredith Whitney predicted hundreds of billions of dollars in municipal defaults.
Whitney’s forecast has proven to be incorrect and municipal default rates is reaching 2009 lows.
But the recent sell-off looks to be ending a five-month rally.
The US election seemed to inject new life into the municipal market and yields reached levels not seen since 1965 as PIMCO’s Bill Gross predicted federal tax rates would be raised on the top income earners.
But prices on municipals have fallen faster than Treasury bonds and the yield on the 10-year benchmark municipal is running neck and neck with 10-year Treasury bond yields.
Some analysts are warning that buying yields at four-month lows will be a mistake and that the market may be ignoring a real threat that the tax exemption on municipals
could be capped in 2013.