The riskiest part of the municipal-bond market is off to its best annual start in five years as Puerto Rico’s record $3.5 billion junk deal leaves demand for higher-yielding securities unslaked.
Tax-exempt local debt ranked below investment grade or lacking a rating has gained 6.2 percent this year through March 17, beating the broader market’s 3.6 percent advance, according to S&P Dow Jones Indices. Similarly rated company bonds have earned 2.7 percent, Bank of America Merrill Lynch data show. With municipalities defaulting at a third of the pace of the past two years as the U.S. economy expands, investors are gaining confidence in lower-rated munis. The improving backdrop is reviving demand after Detroit’s historic bankruptcy filing in July and as Puerto Rico’s sale this month bought the struggling U.S. territory at least 15 months of breathing room.
Puerto Rico has led the junk muni gains, earning about 8.8 percent in 2014, the best annual start since at least 1999, S&P data show. The island’s new general-obligation bonds traded yesterday with an average yield of 8.56 percent, or 0.17 percentage point less than where they priced.
For junk munis, the 2014 start is the best since they earned about 6.5 percent at the same point of 2009, en route to a 35 percent gain that year. The $819 million Market Vectors High Yield Municipal Index ETF, the biggest exchange-traded fund for high-yield munis, traded at $29.53 (HYD) per share yesterday, close to the highest since August, Bloomberg data show. There are signs that high-yield can keep rallying.