- Wednesday, 02/01/2012
- Strong inflows boost market
- Fed policy supportive of municipals
- Tax-exempt income "off the table" in Washington
The continuation of strong cash flows, elevating municipal asset levels for investment platforms has led to a resumption of positive performance for virtually all sectors of the muni market in January. The Barclays Capital Municipal Bond Index† posted a 2.31% gain for the month, and the Barclays Capital High Yield Municipal Bond Index was up by 3.68%. This illustrates both the strong search and demand for yield, as well as the renewed confidence in an asset class which was shunned just a year earlier.
Underpinning all fixed-income markets is the Fed [Federal Reserve Board], which continues to make clear its intention of holding rates at these historically low levels for the next three years, sensing "significant downside risks" despite the appearance of the economy "expanding moderately" in certain areas. It is our opinion that this macro view is supportive of municipals. Why? Because municipal yields typically follow those of U.S. Treasuries, and, in our view, Treasuries are likely to hold to these lower trading ranges. Lower rates would likely also gradually entice issuers to the market to "refund" outstanding higher-cost debt, which should reduce costs for municipalities. We think that any improvement in the economy, along with cost savings, will boost credit valuations.
Finally, removing one potential impediment, senior White House economic advisors have told state and local officials that tax-exempt bond interest is "off the table" and will not be part of the administration's proposed 28% cap on the value of exclusions, deductions and other tax preferences for wealthy taxpayers. This is likely to boost confidence for muni investors.
†Barclays Capital 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 Barclays Capital High Yield Municipal Bond Index is a subset of this major Index.