First Year of Losses Since ’08 Warns Morgan Stanley: Muni Credit – Bloomberg 12-05-12

Salient to Investors:

Morgan Stanley and Municipal Market Advisors says investors should prepare for the first year of muni-bond losses since 2008

Bank of America Merrill Lynch says munis have earned 20 percent since the start of 2011, the best two-year run since 2001.

The median analyst expects 10-yr T-bond yields to rise to 2.23 percent by year-end 2013.

Michael Zezas at Morgan Stanley says the muni rally has left investors with an insufficient cushion against rising Treasury interest rates – a yield jump of as little as 0.18 percent in munis would outweigh interest income and produce losses for the next 12 months. Zezas expects a negative 1 percent total return in 2013, and 10-yr T-yields to rise to 2.25 percent.

Muni debt defaults are set to be the lowest since at least 2009.

Yields on 20-year GO bonds are the lowest since September 1965.

Lipper US Fund Flows show investors have added $49 billion to muni mutual funds in 2012, the most since 2009.

Janney Montgomery Scott predicts munis will outpace Treasuries again in 2013 due to potential tax increases.

Rafael Costas at Franklin Advisers said it’s hard to be overly bullish.

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