Muni Rates Could Increase in 2013

Some market watchers are predicting a modest increase in municipal bond rates in 2013, a turnaround from 2012 which saw rates fall to hit record lows in November.
by | January 5, 2013

Some market watchers are predicting a modest increase in municipal bond rates in 2013, a turnaround from 2012 which saw rates fall to hit record lows in November.

Bank of America Merrill Lynch experts tell Financial Planning that rates will likely increase this year by roughly 25 basis points to 1.93 percent on the 10-year triple-A bond and 3.10 percent on the 30-year triple-A bond. That estimate assumes Treasury market rates will increase during the second half of 2013 to 2.0 percent in the 10-year and 3.25 percent in the 30-year.

"The big caveat is that it’s very supply sensitive,” John Hallacy, head of municipal research for Bank of America told Financial Planning. “It depends on how much muni supply we have across the curve, but especially in the long end, because any time we get hit with a fair amount of supply, the muni-to-Treasury ratio cheapens up a lot, driving rates and yields higher.”

JPMorgan told Financial Planning it is projecting a similar rise in interest rates, though not until the fourth quarter.

James Colby, portfolio manager and senior municipal strategist with Market Vectors ETFs, is predicting rates to trend even higher. He is suggesting 30-year triple-A yields could hit 3 to 3.25 percent and in 10-year yields upwards of 2.5 percent.

Despite projections that 2012 would see higher yields, municipal bond interest rates hit record lows in November. Yields for the 10-year triple-A bond and the 30-year dropped to 1.47 percent and 2.47 percent, respectively. Overall, rates ended the year slightly lower than where they started.

Although this year is expected to improve, other factors such as the fiscal cliff resolution and the global economy could change that. If the resolution creates more uncertainty in the market or if the Euro zone become more stable, U.S. muni rates could fall.

The predictions come as a threat to the tax exempt status of muni bonds was averted in the recent fiscal cliff negotiation. Leaders had feared that taxing municial bond interest would make it more expensive for states and localities to borrow money, thus slowing investment in infrastructure. Although the status was preserved in the recent agreement, observers expect the issue to come up again as Congress takes up tax reform this year.

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