Beyond a growing comfort with lower-rated credits, a diminished supply of new-money issuance has been instrumental to tighter spreads, investors say. For starters, the tremendous amount of current refundings volume has taken out of the market many of the higher-coupon, very short-call bonds — most of which were issued back in 2002 and 2003 with 10-year calls.
Investors want to replace that income, according to Deane. So the preponderance of the cash flows coming into the mutual fund business over the last year have been in high-yield and very long funds.
“And it’s going to go on for at least a majority of this year, too,” he said, “because 2002 and 2003 were two relatively large years for issuance.”
When new issues come to market, spreads tighten, Mulford added. The original price of weak double-As, single-As or triple-Bs might be one level. Then because of over-subscription, often at up to 15 times, you see further tightening before the actual deal is priced, he added.
“And what happens in a low-interest-rate environment, every basis point counts,” Mulford said. “So investors are willing to take some smaller incremental spreads just to add some yield.”
The trend should continue until Treasuries back off significantly, he said, and the muni market should be relatively range-bound over the next 12 months. But 18 months and out, investors could see some widening as the market sells off, Mulford said.
As far as credits go, health care has seen lots of compression and has fared well, McAllister said, as have airport bonds, transportation and toll road credits. But over the course of 2013 performance will become more specific to the credit, he added.
“There will be some health care names that, instead of tightening, they’ll widen out,” McAllister said, “because of the changes that are occurring with the implementation of Obamacare.”
