Munis Rally as States Slash Spending

Florida is firing 1,300 workers. New York is cutting education funding and freezing public employee wages for three years. Arizona is slashing Medicaid coverage. And municipal bondholders are having their best year since President George H.W. Bush was in the White House. Says Mark Stockwell, director of municipal research at PNC Capital Advisors, which has $7 billion in municipal assets under management: “The governors and legislatures are making the tough decisions.”

Bank of America Merrill Lynch’s Municipal Master Index, which measures price changes and interest income, has returned 4.45 percent since Mar. 31. That’s the most since the index of tax-exempts gained 4.47 percent in the first quarter of 1992, according to data compiled by Bloomberg. So far in 2011 there have been 25 defaults on $752 million in municipal debt, down from 60 defaults on $2.87 billion in the first half of 2010, according to Jack Colombo, editor of Distressed Debt Securities Newsletter.