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Muni Yields Plunge to 1967 Low as Obama’s Tax Plans Stoke Demand

November 9, 2012
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Source: Bloomberg

U.S. municipal-bond yields dropped to the lowest in more than four decades as President Barack Obama’s re-election fueled speculation that income-tax rates will increase, boosting the appeal of tax-free debt.

The interest rate on 20-year general-obligation bonds fell 0.12 percentage point to 3.55 percent in the week ended Nov. 8, according to a Bond Buyer index. That beats this year’s previous low of 3.6 percent and is the lowest since April 1967, when Lyndon B. Johnson was president.

Munis have joined in a post-election fixed-income rally led by Treasuries. Obama wants to increase the top federal income- tax rate to 39.6 percent from 35 percent as part of plans to trim the federal deficit, increasing the attractiveness of tax- free state and local borrowings.

“You’re seeing a renewed interest in tax-exemption from the election,” said Hardy Manges, head of muni trading at Mitsubishi UFJ Securities in New York. “You’re seeing a marketplace that thinks taxes are going higher.”

Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., said this week that munis are attractive after the election because of Obama’s plan to increase levies.

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