Even as city and state governments reel, investors are clamoring for their bonds. In fact, muni bond prices have surged throughout the pandemic, the result of the sector’s solid performance in past periods of stress. Yields, which move in the opposite direction of prices, are now at their lowest levels since the 1950s.
Nothing seems to stop this rally. When anxious cities and states offered $42 billion in new bonds in July—the biggest July for issuance in at least 34 years—buyers gobbled them up. When Congress adjourned for its summer recess on Aug. 13 without sending more aid to cities and states, the market shrugged. Hundreds of billions in relief had been on the table, but even without any discernible progress toward getting the legislation passed, municipal bond prices kept climbing.
Yields are now so puny—0.7% for top-rated 10-year munis—that a growing number of pros are turning cautious on the market. It’s true that the yields look better when you factor in the tax advantages of munis; the interest is typically exempt from federal and often from state taxes. But 0.7% is less than one-tenth of a percentage point above the yields of comparable Treasury bonds, and low however you slice it. Earlier this year, muni investors were demanding a premium of two percentage points over Treasuries.
Put differently, the yields may not be enough to compensate investors for the risks—those “horrific” budget holes that Ravitch sees. With so many businesses closing and so many people either out of work or working from home, revenues from sales and income taxes are way off. Ditto for gasoline taxes, tolls for bridges and tunnels, public transit fares, and airport fees.