May 2, 2011 / 8:22 PM / 6 years ago

Flush with cash, investors may spurn munis

3 Min Read

<p>A trader in the 10-year bond options pit at the Chicago Board of Trade signals orders in Chicago June 24, 2009.Frank Polich</p>

CHICAGO (Reuters) - The U.S. municipal bond market is entering its spring-summer period when big amounts of cash flow into investors' pockets from bond coupon payments and redemptions.

Coupon payments alone for May, June and July should mirror the $21.3 billion paid out during the same period in 2010, according to Municipal Market Data. But 24 consecutive weeks of sizable outflows from municipal bond funds could indicate the money will not be returning to munis.

"I think the answer from flows in the mutual funds is that not very much of (the reinvestment money) is expected to come back," said Philip Fischer, managing principal at eBooleant Consulting, on Monday.

Still, longer-term tax-exempt munis are cheap versus comparable U.S. Treasuries, with 30-year bonds yielding 104.5 percent of comparable Treasuries on Monday. Also, issuance, now at an 11-year low, should pick up once states balance their new budgets, and the probability of widespread muni defaults is low, Fischer added.

"I think those are strong technicals. If you had a normal kind of market, you'd expect someone to be arbing that and buying munis," he said.

On Monday, yields ended unchanged on MMD's benchmark triple-A scale at 2.85 percent for 10-year bonds and 4.58 percent for 30-year bonds.

Prior to Monday, yields on top-rated general obligation muni bonds had been grinding lower as prices rose for 13 straight sessions. As a result, yields on 10-year and 30-year bonds are at their lowest levels so far in 2011.

Still, yields are substantially above the all-time lows of 2.17 percent for 10-year bonds and 3.67 percent for 30-year bonds reached in August 2010 on MMD's scale.

Meanwhile, Standard & Poor's Ratings Services said on Monday that the handful of nonprofit electric utilities with a significant stake in nuclear power plants could face increased costs as a result of greater U.S. scrutiny of the nuclear industry in the wake of Japan's nuclear plant troubles.

"Currently all of the public power and cooperative issuers with stakes in nuclear power are investment grade companies," the rating agency said in a report. "They will likely remain so until we see whether the (Nuclear Regulatory Commission) issues any mandates that have material implications for the cost, operations, or relicensing of nuclear plants."

Editing by Leslie Adler

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