Newspaper article The Christian Science Monitor

Bondholders Bail out of Municipal Bonds as the Supply Drops

Newspaper article The Christian Science Monitor

Bondholders Bail out of Municipal Bonds as the Supply Drops

Article excerpt

ONLY Ebenezer Scrooge could be happy with the rout the municipal bond market has taken this year.

The number of new issues is down sharply, and refinancing of existing bonds also has fallen to a low level. Bondholders have been bailing out of municipal bonds ("munis") as quickly as they can speed-dial their brokers. A modern-day Scrooge, with stacks of munis in his portfolio and the financial ability to hold them, might welcome the fewer new issues, saying "the better to drive up the value of existing older bonds."

Given the rise in interest rates, however, the outlook for the next few months isn't much better. Bond prices move inversely to interest rates. As rates climb, bond prices drop.

While the bond market, in general, has stabilized recently, "there's the possibility that we may encounter another selling wave," says Arnold Kaufman, editor of "The Outlook," a financial digest published by Standard & Poor's Corporation.

"The sell-off in municipal bonds in October and November of this year was somewhat of a scary drop," as investors in bond mutual funds and individual bondholders divested holdings, Mr. Kaufman notes. Within the bond market, all eyes are on the Federal Reserve, which has boosted interest rates to ward off inflation. Inflation erodes the value of existing fixed-income instruments.

In recent years, municipal bonds have become popular because their yields are generally higher than those of United States government bonds and, in some situations, they are exempt from federal, state, or local taxes. Munis are one of the few remaining tax shelters for middle-class Americans.

By the end of 1993, the public held more than $1.1 trillion in outstanding municipal issues. State and local governments sold the bonds to provide financing for taxpayer-supported projects. And the public couldn't seem to find enough bonds to buy. …

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