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A Second Half Story - Monday, 06/10/2013

In the past I have referenced "headline risk" as a market impediment to which the municipal market seems inexorably tied. The municipal market still appears, to me, unable to shrug off the wet blanket of concern that most recently has taken cash away from muni assets and pushed yields higher. See the tables below; in my view, the Barclays Municipal Bond Indices demonstrate that the increase in yields may have caused negative returns for the month of May.


"AAA" MMD Muni Yields % (as of May 31, 2013) 

 Maturity 

4/30/2013 

5/31/2013 

Changes 

5 YR (2018)

0.74

0.94

+ 20 bps

10 YR (2023)

1.69

2.09

+ 40 bps

15 YR (2028)

2.25

2.60

+ 35 bps

20 YR (2033)

2.55

2.90

+ 35 bps

25 YR (2038)

2.77

3.13

+ 36 bps

30 YR (2043)

2.84

3.22

+ 38 bps

Source: Mesirow Financial, Municipal Market Data (MMD)



Barclays Muni Index Performance % (as of May 31, 2013) 

 Index 

MTD 

Last 3 MOs 

YTD 

Muni Bond Index

-1.22

-0.57

0.15

Muni 10 Year Index

-1.80

-0.79

-0.17

Muni High Yield Index

0.20

1.86

3.11

Source: Bloomberg


I have also spoken in the past about the technical aspects of reinvestment opportunities: modest new issue supply; a renewal of demand based upon higher marginal tax rates and large amounts of cash generated from coupon payments, bond maturities and calls. I believe these technicals remain very much in place and may support a sound finish to second quarter results. In my view, because municipals are not generally well understood, even the slightest dent in the armor can cause hesitation. I believe this has recently occurred. Now that headlines are trumpeting the notion that the Federal Reserve may raise rates this year, the ardor for municipals appears to have cooled.

As coaches instruct their charges during half-time breaks, there is still a lot of game left to play. Much as they did in the second half of 2011, I believe municipal bonds now have many fundamental reasons to potentially turn around before the year is through. I will discuss some of these considerations in future commentaries.


The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Municipal 10 Year Index is a subset of the broader index. The Barclays Municipal High Yield Index is considered representative of the broad market for below investment-grade, tax-exempt bonds with a maturity of at least one year.


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