The municipal bond market is going up in smoke once again with yields highest since August 2009. An “avalanche” of supply is coming, with few takers. Bloomberg reports ‘Avalanche’ of Sales Drives Rates to 16-Month High

Yields on top-rated tax-exempt securities due in 30 years climbed twice as fast as those on U.S. Treasuries, reaching the highest level in almost 16 months.

The prospect that tax-free municipal issuance will surge if the Build America Bonds program isn’t renewed after Dec. 31 drove 30-year tax-exempt rates up 20 basis points, or 0.2 percentage point, to 4.84 percent, the highest since Aug. 17, 2009, according to a Bloomberg Valuation index.

Bondholders sought buyers for $1.4 billion in debt yesterday, the most since June 15, 2006, according to a Bloomberg bids-wanted index.

“Nobody’s bidding,” Tony Shields, a principal in the public-finance department at Williams Capital Group LP in New York, said in an e-mail. There’s “an avalanche of bid-wanteds, and there is just not enough liquidity to accommodate this much sell-side pressure.”

Amid the rising yields, New York City cut today’s tax- exempt offering by two-thirds to $100 million citing “volatile market conditions,” the Office of Management and Budget said in a press release yesterday.

Long-term rates may increase more than 50 basis points next year if the Build America program isn’t renewed, according to a research note by analysts led by John Hallacy, manager of municipal research at Bank of America Merrill Lynch in New York.

I am strongly opposed to BABs because the last thing we need right now is a government takeover of the municipal bond market. Taxpayers are already on the hook for hundreds of billions of dollars of Fannie and Freddie debt. We do not need taxpayers on the hook for trillions in municipal debt.

For more details on the need to stop BABs and how you can help, please see Time to Kill Build America Bonds (BABs).

For more details on the muni massacre, please see Bloodbath in Muni Bond Funds; Reasons for the Muni Selloff; Will it Continue?

Mike “Mish” Shedlock
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