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January Rebound - Thursday, 01/31/2013

With the political ripples of the "cliff" and inauguration finally reaching the edge of the pond, the markets appear to be once again fully engaged in the dissection of domestic economic releases, earnings and European monetary drama. The elements that I believe sparked a year-end selloff have now receded, allowing municipals to push forward with a month-to-date gain of 0.62% as of January 25, 2013.* New flows into municipals, along with cash from calls, maturities and coupon payments are again positive, overwhelming a meager January supply: a formula that is prevalent in most years, coined the "January Effect."

Municipal high yield has continued to push the envelope, as credit spreads narrow further (32 basis points this month). Recent new high-yield issues brought to market report having been oversubscribed as much as 5–8 times, and once trading, have seen bids higher by 1–2 points within the first half hour.

Puerto Rico, shaken by downgrades and negative news at the end of last year, has also rallied in January, posting month-to-date gains of 2.61%.* My sources report that, while it is still early in the new administration of Puerto Rico Governor-elect Garcia Padilla, it would appear that there may be bi-partisan support for the effort to narrow the $1 billion deficit through some combination of cost reductions in public health and government payrolls. Business initiatives to create some 10,000 new jobs have also been presented, which may give hope to investors that the long period of economic decline might be arrested. Price performance of Puerto Rico debt year-to-date, in my opinion, seems to evidence the market's awareness and hope for this effort.

Spreads Continue Narrowing Graph
Source: FactSet as of 1/28/13.

*Based on the Barclays Municipal Bond Index, which is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year. The Barclays Puerto Rico Municipal Bond Index is a subset of this broader index.

Based on the Barclays Municipal High Yield Bond Index, which is considered representative of the broad market for below investment-grade, tax-exempt bonds with a maturity of at least one year.

Yield to Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.


 


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