U.S. state and city debt is set to outpace Treasuries for the longest stretch since 2005 on bets that tax increases will be part of lawmakers’ plans to shrink the nation’s deficit.
The $3.7 trillion municipal market has rallied each week since the Nov. 6 re-election of President Barack Obama, who wants to make top earners pay higher taxes on ordinary income, capital gains and dividends. Helping fuel the gains, U.S. muni mutual funds added $1.1 billion in the week to Nov. 21, the most since August, Lipper US Fund Flows data show.
Investors are also set to receive about $21 billion next month from maturing local bonds, funds they will be looking to reinvest, according to Janney Montgomery Scott LLC in Philadelphia.
“There’s a wall of cash out there right now that’s waiting for debt to come to the market,” said Michael Pietronico, who manages $860 million of munis as chief executive officer of Miller Tabak Asset Management in New York.
Obama has proposed raising the top federal tax rate on ordinary income to 39.6 percent from 35 percent. His administration is talking with congressional leaders about ways to avert more than $600 billion of spending cuts and tax increases set to start in January, in the so-called fiscal cliff.
The surge in demand pushed muni yields to the lowest since 1965 last week, according to a Bond Buyer index. Munis have earned 1.7 percent this month, compared with 0.6 percent for Treasuries, Bank of America Merrill Lynch data show. Local debt has been the better bet each month since June, the longest span since February 2005.
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