I went into munis big time a year ago when rates spiked. Now it may be the time to rotate out. Comments for readers would be welcome! Here is the logic:
Muni yields drop to ten-week low, and yet the yield curve today is at record steepness. The long bond seems destined for over 5%, and we now see projections of 6% (from Citi). The Fed is unwinding QE in Treasuries, which makes higher rates likely in 2010; will this also drive muni rates back up? Past history says the yield curve gets even steeper until about 18 months after a recession ends. Assuming we ended in Q3, this targets higher rates into 2011.
Sure, there are some distressed bond States, such as NY and California, but this question is not about the potential failure of muni’s to pay. At the top in 2000, dot-coms cut everything back except their lifeblood, their web sites. (Exodus was a short waiting to happen, since it was the beneficiary of those walking-dead websites, until they finally had to turn off the lights, and then Exodus crashed too.) In the coming ’10s, States will do everything to cut back except their lifeblood, the muni bond market.
Right now money flowing into munis is slowing. This might just be year-end tax planning, with a new surge in January. Or it may signal a change of trend.