Muni market yields are sharply lower this week, with investors bidding up the value of tax-free municipal bonds as the stock market takes a dive.
The annualized tax-free yield, according to an index of 40 long-term muni bonds, fell from 5.07% on Wednesday to 5.02% on Thursday, its lowest yield since November of last year, when the muni market witnessed a huge sell-off that lasted until January.
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Investors fled from the muni market late last year as they grew increasingly concerned about the health of state and local government finances. Wall Street banking analyst Meredith Whitney added to the fear with her prediction that “hundreds of millions of dollars” of municipal bonds were likely to go into default in 2011. The sell-off pushed bond yields to a two-year high of 5.95% in January.
However, the much-feared defaults never materialized, and the muni market has been rallying since April. With muni bond issuance down this year as state and local governments try to borrow less, high demand has been pushing up prices and pushing yields lower and lower.
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Whitney still thinks investors are underestimating the negative impact that state and local governments’ crumbling financials could have on bond holders. Just this week, the town of Central Falls in Rhode Island filed for bankruptcy protection, and Jefferson County, Alabama may soon do the same. But in the meantime, those investors holding onto their muni bonds while others fled are now cashing in.