Municipal bonds issued three to five years ago are “absolute gold” now, an asset manager says. Here’s why.
Everyone wants state and local-government bonds. That’s a good thing if you already own muni debt, and a bad thing if you’re trying to get your hands on some.
The yield on the S&P Municipal Bond Index this summer fell below 1% for the first time since it was created in 1998. The index tracks returns on a selection of core municipal bonds from across the market and assumes any interest thrown off is reinvested. The yield in question—known as yield to worst—is the lowest rate the investor can expect to earn short of a default.
Still, investors can’t get enough of the bonds. Prices have surged even though outstanding muni debt has swelled by more than $100 billion in the year ended March 31, according to Federal Reserve data. Cities and states could probably sell an additional $89 billion in bonds without meaningfully driving down prices, according to an analysis of lending capacity by Municipal Market Analytics. Bond yields rise as prices fall.
“If you’re sitting on bonds that were issued three to five years ago I would ride it out,” said Greg Zandlo, president of Minneapolis-based North East Asset Management. “It’s absolute gold.”
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