The Trend Is Your Friend
- Friday, 05/04/2012
In contrast to what, historically, has been normal for the end of April, municipal performance ended the month on a very positive note. The Barclays Capital Municipal Bond Index1 was ahead by 1.15%2 and the Barclays Capital High Yield Municipal Bond Index1 nearly doubled that at 2.23%2. As I have pointed out in prior posts, the technicals driving demand are all favorable. Municipal fund flows have been a positive $18.2 billion YTD, and new issuance — although up from a year ago — has barely been keeping pace with demand. Cash flow from maturities and called bonds, according to street source Siebert Brandford Shank & Co., is estimated to be higher this May by nearly $3 billion over last year. Average monthly reinvestment into municipal bonds in 2011 was $22 billion, but it is already $1 billion higher in 2012.
Although market strategists continue to tout "intermediates" in the 8–12 year range as the prime area of opportunity, high-yield muni bonds have seen steady inflows, further driving performance and pushing yields lower up to this point. A positive report from tobacco producers (less negative sales and distribution results) has led to a broad-based rally in the tobacco sector in high yield. Between 3/31/12 and 4/30/12, the yield of the Barclays Capital High Yield Tobacco Index1 fell from 7.34% to 7.09%.
Big Picture View
My conclusion in looking at two important elements of economic activity for the individual states listed below is that broad recovery remains uncertain and continued vigilance of credit must temper the optimism generated by positive returns. I think that diversified portfolio structures may potentially offer the proper "hedge" required by investors.
1-Year Change in Home Prices (as of 2/29/12)
Source: Federal Housing Agency
4Q'11 – 4Q'10 Change in Sales-Tax Revenues
Source: Federation of Tax Administrators
1The 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 considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Capital High Yield Tobacco Index is a subset of the broader Barclays Capital High Yield Municipal Bond Index.
2Time period: April 1 - 30, 2012