Alert May 14, 2009

Muni-Treasury Benchmark Missing the Mark

Investors have long relied on the yield ratio between AAA-rated municipal bonds and U.S. Treasury bonds to measure the respective appeal of each investment. For the past 20 years, the yield on 10-year, AAA-rated municipal bonds hovered between 75% and 90% of the yield on 10-year Treasury notes. When the ratio dipped below 80%, investors tended to buy munis; when the ratio moved above 80%, U.S. Treasuries were purchased. Since 2007, however, the credit crunch and subsequent economic downturn have thrown investors an unexpected yield curve. In 2008, Treasury yields plunged and municipal yields rose as investors sought the safest sanctuary for their investment dollars. Consequently, the muni-treasury yield ratio has been flipped on its ear, rising as high as 186% during 2008. Although the ratio has flattened in recent months to approximately 100%, investors are revisiting their bargain hunting criteria. Historically, a 100% ratio would have prompted investors to purchase Treasury notes with abandon. In today’s cautious climate, however, 100% is the new 80%, as investors wait for the turmoil to subside.