The municipal bond (muni) market in the US has been on fire lately. Seems investors have discounted Meredith Whitney's famous dire forecast.
SFGate: Investors in the $3.7 trillion U.S. municipal-bond market are buying long-term debt at the fastest pace since the eve of Meredith Whitney's 2010 prediction of "hundreds of billions of dollars" of public-borrower defaults.As the chart below from JPMorgan shows, the flows into muni funds represent at least a partial reversal of what was occurring in this market the same time last year.
|Muni fund flows (source:JPMorgan)|
|S&P Muni Index vs. the iBoxx US treasury index (Bloomberg)|
|Net new supply of municipal bonds - 2012 forecast vs. 5-year average (source: JPMorgan)|
Clearly risks to the downside remain. A disruption in global credit markets could quickly widen municipal bond spreads. A less likely scenario is a sharp steepening of the US treasury curve that may hurt the longer term munis. These risks aside however, the limited supply and low rates should provide sufficient support to the muni market, as flows into fixed income funds continue.