T. Rowe Price, Deutsche Bank Private Wealth Management and the Phoenix Companies are among the investors moving assets out of the taxable market and into the municipal bond market to eke out extra returns. Munis are reaching historic levels of cheapness against Treasuries and their continued cheapening could inspire even more buysiders to cross over to the tax-free side, according to John Miller, municipal bond manager at Nuveen Investments in Chicago.
Yields of 30-year munis currently match or are even higher than those offered on comparable Treasuries, while the long-term historical average for these yields is 85% those of Treasuries. Two trends have contributed to the anomaly: munis have cheapened over the past year because of surprisingly high new issue volumes and at the same time, Treasuries have rallied despite interest-rate hikes.
T. Rowe Price has built up a 3% muni allocation in a $3 billion strategy since the beginning of the year, according to Dan Shackelford, manager of $7 billion in taxable fixed income from Baltimore. While he declined to give examples, he said he is looking for double-A and triple-A names.
Gary Pollack, portfolio manager at Deutsche Bank Private Wealth Management said he recently sold the 4.25% of '13 Treasury to buy the Financial Security Assurance-insured 5% of '13 New York City bonds. The ratio for municipal yields to Treasuries is only about 89% in that part of the curve and he would gladly go out further but is constrained by his portfolio's short duration. Pollack has a 2% position of the $10 billion taxable accounts that allow this type of crossover.
The Phoenix Companies have also participated in this trade. David Albrycht, portfolio manager of $4 billion in fixed income, recently upped the percentage of munis in his intermediate fund to 4% from 2%. The Hartford, Conn.,-based manager sold 30-year Treasuries to buy 30-year munis, such as the 4 3/8% of '30 University of California Revenue bonds. He said he found the security's yields attractive at 103% that of comparable Treasuries.
While buying may be on the rise, bond market participants say any shifts are likely to be short-term relative value plays and not a long-term move out of the taxable market. "This is more of a temporary tactical move to take advantage of the relationship between Treasuries and munis," Pollack said.