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Lebenthal: What a government shutdown means for municipal bonds

Talking Numbers

What does the US government shutdown mean for the $4 trillion municipal bond market? Alexandra Lebenthal, CEO of Lebenthal & Company and a CNBC contributor, discusses the impact.

We’re in Day 3 of the US government shutdown. And, while most investors focus on the impact to Treasury debt, ripples may be felt in the $4 trillion municipal bond market. Talking numbers with Talking Numbers is Alexandra Lebenthal, CEO of Lebenthal & Company and a CNBC contributor.

Municipal bonds were having a pretty good month. In late September, the Federal Reserve Bank announced that it was not tapering its $85 billion per month US Treasury and mortgage bond-buying program. The market, which had selling off bonds since May on taper fears, began buying back bonds. That sent yields on the benchmark 10-year US Treasury note down from around 3% to below 2.6% as bond yields move inversely to bond prices.

(Read: The government shutdown probably kills the 'Octaper')

Moving along with the US 10-Year bond has been the Barclay’s Municipal Bond index. Its yield started September near 3.45% but fell with Treasury bonds to below 3.1%. ETFs composed of muni bonds rallied over the past month, up 2.7% since early September.

But, with the threat of a possible US Treasury default in two weeks should Congress and the President not come to an agreement, how will that affect the municipal bond markets?

One of the foremost experts on municipal bonds, Lebenthal notes that there are specific types of bonds that could be directly impacted in the event of a default: “Build America Bonds” which are taxable municipal bonds created as part of the fiscal stimulus. And, besides what’s happening on Capitol Hill, the municipal bond market is focused on another part of Washington, DC – The Federal Reserve Bank.

(Read: Boehner tells Republicans he won’t let the nation default)

“Obviously, people are concerned about interest rates going up,” says Lebenthal. “And, frankly, if the market is concerned about anything, it’s when tapering will end.”

Lebenthal also says there are deals to be had in the muni market, with some revenue bonds yielding about 5% tax-free.

To hear Lebenthal’s analysis of what impact – if any – the federal shutdown is having on municipal bonds, and to hear what bonds Lebenthal thinks are buys, watch the video above.

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