Waiting To Exhale
- Friday, 03/21/2014
The week of March 10, 2014 will not, in my opinion, soon be forgotten by investors and market participants — as much as for what did not happen (calamity) and for what did (successful municipal bond underwritings). Once again, last week demonstrated the apparent resilience of the municipal marketplace. And, in my view, it reaffirms the ability of this market to generally deliver capital where and when it is needed.
Although the much anticipated $3.5 billion Puerto Rico new issue dominated the week, several other significant underwritings — including a $1.6 billion California deal — flooded the market with fresh municipal bonds and threatened to pressure prices of the secondary market. Yet the market held firm in the face of this supply. Demand for the Puerto Rico issue, buttressed by perhaps as much as $16 billion in interest from hedge funds and other alternative investors, according to analysts, allowed the bonds to be offered as high as $97 from their initial price of $93 within the first few hours of trading.
One-Week Change in the AAA Municipal Bond Yield Curve
Source: Municipal Market Data (MMD) as of March 14, 2014.
The performance of municipal bonds generally has been positive year-to-date 2014. Some analysts feared the new supply was likely to derail this momentum but so far it has not. As the above chart suggests, the decline in yields of AAA-rated municipal bonds for the week is representative of healthy demand as investors appear to become re-focused on the municipal bond market. All of the foregoing seems to me to be a stamp of approval on a potential about-face for performance from 2013. Last Friday, the sound of a collective exhalation (sigh!) from those managers and underwriters who worried about an end to the current rally was clearly audible in the industry.
The Market Vectors High-Yield, Short High-Yield, Long, Intermediate, and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks, including economic, political, regulatory, or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.