(Bloomberg) -- The $3.7 trillion municipal market is on pace for its first monthly loss of 2014, and trailing gains in Treasuries amid a glut of issuance by states and localities.
Benchmark 10-year munis yield 2.28%, compared with 2.34% on similar-maturity Treasuries, data compiled by Bloomberg show. The ratio of the two interest rates, a gauge of relative value between the asset classes, climbed above 100 percent yesterday for the first time since February. A rising figure signals that tax-free bonds are weakening relative to their federal counterparts.
Munis are on pace for a November loss after a record 10 straight months of gains to start 2014. The market has declined 0.28% this month through Nov. 14, Bank of America Merrill Lynch data show. States and cities are borrowing with yields close to generational lows, preparing the most bond sales to end a year since 2011, Bloomberg data show.
It has been a very solid year, and the last thing you want to do is chase it at the end, said John Dillon, managing director at Morgan Stanley Wealth Management in Purchase, New York. Youre starting to feel the pressure a little bit as far as the supply building.
Munis have earned 8.7% this year, beating company bonds and Treasuries. Theyve also defied forecasts from analysts and investors that local debt would deliver losses in 2014 amid rising interest rates. Yields instead fell toward five-decade lows last month, luring borrowers.
Even with this months losses, yields on benchmark 10-year munis are below the 2014 average of 2.39% and the five- year average of 2.46%.
Historically, investors have been willing to accept lower yields on munis than on Treasuries because of the tax benefits of city and state debt. The yield ratio has averaged 92.6% in 2014 and 98% for the past five years.
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