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Cave Idus Martias – Municipals - Thursday, 03/14/2013

Beware the Ides of March

Yes, yes, this Shakespearean reference is a little over the top but it has been readily observed by many authors that the month of March has often been a cruel one for participants in the municipal bond market. In this year — MMXIII — it just so happens that we have had, so far, a stellar 10% rise in the Dow in tandem with the dual crises of sequestration and Federal government funding (shutdown), creating headlines that I believe place doubt ahead of decision in the minds of fixed income investors.

It is unique to have evidence suggesting, in my opinion, a certain annual and reliably repetitive market pattern. In a normal year, increased muni bond new issuance and reduced reinvestment flows might be all that is required to perpetuate this pattern of weak performance in March on the heels of a good month of February.


Monthly Municipal Reinvestment Chart

Source: Municipal Market Advisors as of 2/28/13. Historically, municipal reinvestments are lowest in March and April. 


The Barclays Municipal Bond Index1 returned a positive 0.30% last month (February). As our friends at Municipal Market Advisors (MMA) point out, only five times since 1990 has price performance been positive in March.

So, Quid Facere? (What to do?)

It is important to remember that the months following this late winter pattern have the potential to produce positive returns because adjustments to yields may generate attractive price points for investors when they re-engage. Also, I believe it remains a central theme that the Fed will continue to target low rates in the near term, which caps the upward boundary for municipals just as it does for treasuries. The yield to worst of the Barclays Capital AMT-Free Intermediate Continuous Municipal Index2 was 2.31% as of 3/13/13. On a tax equivalent basis3 that is 3.21% for taxpayers in the 28% bracket and 3.82% for those in the top 39.6% bracket. For investors who recognize the value accruing to the tax-free nature of the coupon, the intermediate area of the municipal market is still generally regarded as — near term — an attractive position from which to grab income as well as return from a steep yield curve.

Yes, beware the Ides of March, but be mindful of the opportunities.


1The 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.

2Yield to worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date. The Barclays Capital AMT-Free Intermediate Continuous Municipal Index is a market value weighted index designed to replicate the price movements of medium-duration bonds with a nominal maturity of 6-17 years.

3The tax-equivalent yield is used by investors to compare taxable and tax-exempt securities after accounting for federal taxes (excluding AMT). It represents the yield a taxable bond would have to earn in order to match — after taxes — the yield available on a tax-exempt municipal bond.
 


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