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Value In Plain Sight - Wednesday, 06/20/2012

The secondary market for municipal bonds has been somewhat subdued the past several days. The broad market successfully absorbed over $10 billion in new issues last week, with some selling of high-grade muni bonds in the secondary market, possibly to fund purchases or restructure segments of existing portfolios. Municipal bond yields have been moving slightly lower but have generally underperformed U.S. Treasuries, which I believe makes their relative valuations look all the more appealing to non-traditional managers looking for potential trading opportunities.

The table below shows the ratios of AAA municipal bonds to U.S. Treasuries as of 6/14/2012, based on the Municipal Market Data (MMD scale).1 With nominal yields of municipals currently well above those of U.S. Treasuries, in my opinion this suggests that municipal bonds must be in the discussion as an attractive near-term choice for inclusion in portfolio allocation models. I currently see value in the 7 to 15 year maturity range, accessible through the Market Vectors Intermediate Municipal Index ETF (NYSE Arca: ITM).
 

 Maturity 

MMD Ratio to Treasuries (%) 

1 Year

116.27

2 Year

110.43

5 Year

111.27

7 Year

121.50

10 Year

117.39

15 Year

131.86

20 Year

130.51

25 Year

127.09

30 Year

116.48

Source: Municipal Market Data as of 6/14/2012

1In the municipal bond market, the accepted measure for the risk-free rate is the triple-A scale published by Municipal Market Data every day at 3:00 PM (commonly referred to as the MMD scale).  

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