Citi Says: Muni Market Reaches an Uneasy Equilibrium

George Friedland of Citi wrote: “The municipal bond market finally reached a resting point over the second half of last week, with yields actually declining modestly in some sectors. We cannot be confident that the worst is over until bond funds stop experiencing severe outflows. Nevertheless, a key component of the “feedback loop” that has pulled tax-exempt yields sharply higher — projections of widespread defaults and bankruptcies on local credit — will, we are confident, turn out to be vastly overstated, and, as the realization of this likely outcome takes hold in coming weeks and months, the fund outflows should decline and the muni market should reach a more lasting equilibrium, at the very least, or even rally fairly sharply.”

 

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