Investors grab suburban bonds, discount state credit troubles

U.S. Treasury 10-year yields dropped again this week, to around 1.65 percent, with investors worldwide fleeing fallen stocks and energy for safe, slow returns (30-year USTs are at just 2.54.)  By contrast, 10-year U.S. municipal bond yields are up again, though not as much as last week, to 1.72 percent, notes Glenn Williams, president of Philadelphia-based registered investment advisor A.H. Williams, citing Bloomberg LP data. 

The Treasury/muni yield gap is the biggest since October, and shows tax-exempt bonds are "cheap by comparison," Williams tells me. Even at "50-year lows," muni yields are attractively priced, compared to other bonds -- even for towns in Pennsylvania and New Jersey, which share with Illinois the lowest state credit ratings, due to political budget fights and underfunded public-worker pensions.

Williams cites a recent small 20-year Radnor Township issue that yielded just 3.1%, and a Bergen County Improvement Authority sale that drew $30 million in orders for just $5 million worth of bonds, yielding just 3.3%. Rates haven't been that cheap "since the 1960s," says Williams.

He cautions against buying too many long bonds at very low rates that seem to leave no room for financial turmoil at the issuers. And he notes states tend to solve their financial problems over time: Ten years ago California seemed headed for insolvency; it's now rated higher, and yielding lower, than Pa. or N.J.

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