Some Say Now Is Time to Buy Munis Despite Surging Supply
Surging supply and static demand usually don't bode well for bond prices. So why are many analysts pounding the table for muni bonds?</br></br>Falling interest rates and the economy's impressive growth have cleared the way for a torrent of new municipal bonds in the past year. Through Monday, $59.3 billion of new muni bonds were sold this year, up 62% from the $36.7 billion peddled during the year-earlier period, according to Securities Data Co. The amounts exclude securities maturing in less than one year. Issuance last year was $221.4 billion, up from $185 billion in 1996. Both new issues and refundings of previous deals have climbed, and volume should top $240 billion this year. In short, "the supply has been massive," says George Friedlander, Salomon Smith Barney's municipal-bond strategist.</br></br>Meanwhile, the inexorable climb of the stock market and super-slim bond yields have reduced demand from individual investors for muni bonds despite their tax-free status. Although interest has picked up in recent weeks, prices of muni bonds remain low compared with comparable Treasury issues.</br></br>"Munis have certainly done lousy this month, though short- and intermediatebonds have held up OK," says William Stevens of Montgomery Asset Management.</br></br>Still, many market participants say munis could represent the best bargains in the bond market. They say new bond issuance should begin to slow in the coming months, due to limitations on how many times issuers can replace outstanding bonds with new bonds. New bond issuance also should slow because many issuers have already come to market in recent months and won't be back again for some time.