Effect on Munis from No Fed Taper
JIM COLBY: The decision by the Federal Reserve on September 18th to leave the stimulus program on the table created a noise heard around the street. That noise was a big sigh of relief. This meant that interest rates were expected to rise in the near-term, which gave a boost to fixed-income markets – especially treasuries and municipal bonds, to the effect of reducing interest rates by as much as a quarter of a percent and giving a real boost of confidence to fixed-income participants that the markets may remain relatively stable through the remainder of the year.
That action, along with the decision by Larry Summers to not seek the chairmanship of the Federal Reserve, gave additional confidence to the marketplace – that we may be looking at relatively muted changes in interest rates in the near term, a further the boost in confidence for investors.
What does this mean for musical bond investors? Well, it means that investors can now begin to look at the marketplace for opportunities to reinvest their coupon income into places other than cash equivalents, which actually have captured a great deal of the outflows that have occurred over the last three or four months.
Choosing a Segment of the Yield Curve
COLBY:For muni investors, they should consider the fact that there is a strategy to employ here, near-term, part of yield curve that has in fact demonstrated an ability to perform better than many of the other areas and segments of the market over time. I'm talking about the intermediate part of the municipal yield curve. Historically, returns have been strong, and as a comparison, there is less risk to the municipal investor in the intermediate part of the curve than there is investing in the long part of the curve. The risk-reward opportunity to capture yield by positioning in the immediate part of the curve is what I'm talking about with this particular strategy.
Muni Market Outlook
COLBY: The risks that are inherent in the marketplace right now, in terms of interest-rate movement, near-term, have been muted by the results of the Fed's decision to not take stimulus off the table. Long-term, we're still looking at a very uncertain marketplace. We don't know who's going to become Fed chairman. We don't know what kind of policies will be promulgated by the Federal Reserve or by Congress with respect to preparing and completing the budget as we're coming up to the end of our fiscal year. Those features and those factors are going to play heavily into decisions investors will have to make down the road. I think it's very clear that in the near-term, we have a chance to get back to basics.
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