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Barron's on muni credit risk

Avoid high yield muni CEFs, all muni CEFs, or stand pat? I don't know.

Cities and States Are Facing Horrific Budget Holes. There Will Be More Trouble Ahead.
By Leslie P. Norton and Stephen Kleege
Barron's
Aug. 28, 2020 2:18 pm ET

...

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.

...

full article

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