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Municipal bonds: Muni market panic uncalled for

Will the BAB programme be renewed?; California deal shows signs of relief

The volatility in US municipal bond yields in November revived questions about the financial health of states and cities. The annualized yield on the Bond Buyer index of 40 long-term muni bonds nationwide reached a 2010 high of 5.51% on November 17.

Against the background of state deficits, swings in muni bond yields invariably grab headlines. In a survey of about 100 municipal industry participants by RBC Capital Markets at the end of October, nearly half said they expected another five years or more would pass before state and local government revenues returned to pre-crisis levels.

As reported in Euromoney in September (Judgement day nears for the benighted states), US states started the 2010 fiscal year facing $192 billion in deficits. "Concerns about sovereign risk in Europe also encourage comparisons, rightly or wrongly, to be drawn with US states," says Jim Pass, managing director and municipals portfolio manager at Guggenheim Partners.

But market participants say concerns about muni bond defaults are unfounded despite the fact that the Barclays Capital municipal bond index suffered its biggest monthly fall since September 2008 (2.2%) in November. Indeed 81% of those surveyed by RBC believed public perception of the credit quality of the muni market is too negative.

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