If the recession is hurting tax revenue, why did muni bonds perform so well last year?
Mr. Alwine: Municipal bonds returned 12.9% last year, as measured by the Barclays Capital Municipal Bond Index. That was the highest return for the index since 1995. But that gain was preceded by a drop of 2.5% in 2008, when many investors flocked to Treasuries in a flight to quality. So part of the 2009 gain was a snapback from investors’ worst fears. Last year’s gains were also driven by two other factors. First, the fiscal stimulus from Washington reduced the budgetary pressure on many municipalities. Second, the creation of the Build America Bonds program provided municipal issuers with access to taxable, highly liquid markets on attractive terms. This reduced the supply of tax-exempt municipal bonds, creating a shortage relative to demand.
