MUNIS-Prices off; Wisconsin vote could help state bonds

Wed Jun 6, 2012 4:19pm EDT

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(Reuters) - Municipal bond prices fell and yields rose on Wednesday, squeezed by a retreat in the Treasury debt market, though yields remained near historic lows.

The municipal bond market usually surges in June and July, when bondholders often reinvest billions of dollars of coupon payments and redemptions. But that scenario might be dampened as a result of the current low interest rates, said Edward Reinoso, chief executive officer of New York-based Castleton Partners.

"The penalty for staying in cash is so minimal that it may be the better option instead," he said.

In the secondary market, the 10-year yield rose 7 basis points on Wednesday to 1.85 percent on the benchmark triple-A scale calculated by Municipal Market Data, a unit of Thomson Reuters. The 30-year yield climbed 7 basis points to 3.16 percent.

Those levels are still close to the scale's record lows of 1.67 percent in 10-years and 3.04 percent in 30-years.

Muni experts said demand might increase for Wisconsin's paper because Republican Governor Scott Walker's win in Tuesday's state recall election should give investors more confidence in his ability to enact tough fiscal policies.

Matt Dalton, chief executive officer of Belle Haven Investments in White Plains, N.Y., said: "Scott Walker holding onto his chair actually helps the future credit of the State of Wisconsin, and that will filter down to the local authorities."

He said rating agencies might review whether the state is due for an upgrade. "Maybe I'm a buyer of Wisconsin paper," Dalton said.

Domenic Vonella, market analyst with Municipal Market Data, said there was not enough activity in Wisconsin paper to draw any conclusions about the direction of prices.

Moody's Investors Service rates Wisconsin at Aa2 with a stable outlook. Fitch Ratings has an AA rating with a stable outlook on the state.

Fitch on Wednesday said it did not expect to see any changed fiscal policy following the recall vote. The state's 2011-2013 budget did make "notable progress" in correcting longstanding problems, but Wisconsin's "economic performance has been anemic" since the budget was adopted, it said.

"The state still needs to show evidence of structural reforms," said Mark Tenenhaus, director of municipal research for RSW Investments in Summit, New Jersey. He said he does not foresee a ratings upgrade for the state anytime soon.

(Reporting by Joan Gralla; Editing by Dan Grebler)

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