Scared to debt? Not in the municipal market

CHICAGO (Reuters) - Even as states, cities and other issuers in the municipal bond market increasingly get caught up in the U.S. debt crisis, prices and yields for tax-exempt debt have been relatively steady.

Yields on top-rated 30-year munis have barely budged this month on Municipal Market Data's benchmark triple-A scale, starting at 4.36 percent on July 1 and ending Friday at 4.35 percent. At the same time, tensions over raising the federal debt ceiling have escalated along with warnings by major rating agencies that they may cut the United States' triple-A rating along with the top ratings on a slew of muni debt.

One factor for the market's stability is that July is a big month for investors to plow cash from muni coupon payments and bond redemptions back into the market, where supply is at an 11-year low.

"So there was a lot of money in July that helped keep yields relatively stable," said Alan Schankel, a managing director at Janney Capital Markets.

That is not to say the U.S. debt crisis has not or will not spook some investors.

Sales of muni bonds by individual investors picked up sharply this week as Washington's stand-off worsened, according to Chris Shayne, a senior market strategist at Bond Desk Group.

The number of retail sales measured by volume averaged 6,549 during the first four days of this week, including a peak of 7,345 on Tuesday, according to Shayne's preliminary analysis for a Bond Desk monthly report. The daily sales transactions by retail accounts averaged 5,940 in June.

"Retail's been selling," Shayne said. "It's plain as day, when you look at the data. But there's no panic selling. It's pretty orderly."

At the same time, retail buys have turned down, averaging 14,204 transactions on Monday, Tuesday, Wednesday and Thursday, versus a June daily average of 15,278.

"The implication is that the retail buyer appears to be concerned," Shayne said.

On Thursday, Lipper reported municipal bond funds, which are popular with retail buyers, posted $129 million of net outflows in the week ended July 27, after seeing inflows of $123 million the previous week. The four-week moving average remained positive at about $22 million. High-yield muni funds recorded outflows of about $28 million, while exchange-traded funds had inflows of $32.5 million, according to Lipper, a unit of Thomson Reuters.

FMS Bonds Inc, a firm that promotes tax-free bonds to wealthy retirees on billboards along south Florida's Interstate 95, is, however, seeing no falloff in retail buying.

"Everyone's apprehensive but retail demand is strong, if you have the right product," said Terry O'Grady, head of municipals trading at FMS. "Yesterday, we had several million dollars of a Florida issue with mid-term maturities and good structure and good security, and they went to retail in a few minutes.

"It's hard to find any kind of plus in the crisis that our elected officials have created, but people are buying if you have the right product," he added.

Mitchell Savader, chief executive of Savader Asset Advisors in New York, said muni investors are taking a wait-and-see approach.

"A round of downgrades, if they were to come, may scare off some investors but the other options aren't any better, and in fact most of them are probably worse," he said.

Next week, municipal bond sales will rise to $4.5 billion from $3.7 billion this week, according to preliminary estimates by Thomson Reuters on Friday. The New York City Transitional Finance Authority will dominate the new-issue calendar with competitive and negotiated offerings totaling $900 million.

In the broad muni market on Friday, prices ended higher on MMD's scale.

As a result, yields on top-rated 10-year bonds dropped 3 basis points to 2.67 percent while 30-year yields fell 2 basis point to 4.35 percent, according to MMD, a unit of Thomson Reuters.

(Reporting by Karen Pierog; additional reporting by Michael Connor in Miami, Jim Christie in San Francisco and Chip Barnett and Caryn Trokie in New York; Editing by Leslie Adler)