With the economy recovering quickly from the pandemic, interest rates on high and local government securities have dropped to the lowest in over two decades. Money is draining into mutual funds by releasing junk-rated debt so quickly that money managers are fighting to get any new deals in place. And prices have rallied in 2014, pushing high-yield bonds to their biggest rally of outperformance since then.
The demand is so strong that a California agency sold 35 year bonds for the development of a local community at a yield of 4.43%, about two-and-a half percentage points less than the bankers originally anticipated. The price went on to increase 8% in secondary trading.
'We couldn't think of a better time to come to market, said Sarkis Garabedian, an investment banker at Ziegler, the underwriter on bonds. He said the firm hadn't seen such interest in a transaction for a new senior living campus since they started tracking the metrics in the 1980s. ''We really hit the sweet spot here.
Recent bond sales have raised money for an ethanol production facility in Arizona, a bevy of charter schools and a youth-sports complex in North Dakota. American Samoa, a junk-rated territory, has approached the market for the first time since 2018. And the owner of a plant that recycles rice waste into fiberboard could sell more debt, even though it has already been driven to default.
The dynamics show how much the global market for municipal bonds has been swept up in the recent push for higher yield assets as central banks worldwide hold interest rates low to fuel the economic recovery.
That's fueled a surge in corporate debt sales by governments and companies under threat of viruses lockdowns. And for the sovereign debt market, it has derailed the years-long rally in commodities bonds that were only temporarily distorted by the coronavirus lockdowns.
So far this year, U.S. government agencies have sold over $6.5 billion of bonds that can only be marketed to institutional investors able to bear the risk, driving such issuance towards the biggest year on record according to data compiled by Bloomberg.
Cynthia Clemson, co-director of urban investments at Eaton Vance, said that the flood of demand means it is harder for buyers to push for better protections on such deals.
'It's definitely a lender-driven market right now, as opposed to a issuer-driven market, she said.
Junk or unrated municipal bonds are often transferred to the public by governments or public agencies on behalf of businesses like real estate developers, clean-energy factories and others that are prepared to borrow in the tax-exempt market.
'I've never seen a market environment more favorable to borrowers than this one, said Charles Peck, head of public finance investment banking for Wells Fargo Co.
Buyers may be emboldened during the pandemic, when the defaults remained rare even as the municipal shutdowns threatened many industries that have raised money in the economic market. According to data compiled by Bloomberg Intelligence, only a little over $3 billion of bonds were defaulted in 2020 and 2021, a small share of the $3.9trillion market.
Until Covid and into today, market defaults continue to be exceedingly low, said Ben Barber, Head of Municipal Investment at Franklin Templeton. A lot of sectors that have caused notable concern have survived in quite remarkable fashion.
After a sharp downturn in 2020 when the pandemic first hit, municipal bonds were strongly strengthened, providing a return of 5.8% so far this year. According to Bloomberg Barclays Indexes this is over 4 percentage points more than the broader market, the biggest gap in returns since 2014.
Nuveen's Anders Persson and John Miller stressed in a note this week the demand for high-yield municipals, saying that some offerings have been as much as 30 times oversubscribed.
There seems to be little signs that demand is not slowing down. According to Refinitiv Lipper US Fund Flows data, high-yield funds have absorbed a fourth of the $44.7 billion in muni funds this year.
Miller said that we are on the path of the return to normal and the economic boost that comes as a result of this, in an interview with Nuveen this month.
There are many cash in the country and not that many bonds, he said. "In that environment, I think spreads are going to keep increasing, bottom line," rpt.
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