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A Little Negative News Is Good - Thursday, 05/17/2012

The municipal bond market has experienced a significant rally — slow but steady — for nearly three weeks. Supportive data and technicals have pushed the market higher. Despite spreads which point at municipals as a value purchase, surprise news (i.e., Meredith Whitney's prediction of mass defaults in 2010) can erect barriers to further advances. Recently, the market had to digest commentary discussing:

  1. The outlook and sustainability of Tobacco Settlement Bonds; and
  2. Challenges facing Puerto Rico as it attempts to pull its economy out of recession.

The presence of these headlines can turn investor sentiment. Such has been the case in the past few days where municipal bond valuations retreated from recent highs.

Reports from the "Street" suggest a large portfolio may be looking to sell several million municipal bonds, which I believe is leading traders to push back their bids. While a selling of this magnitude could be a market moving event in the near term, the overall result could potentially be positive. I believe it's helpful for investors to view these types of events as potential opportunities. Whether it is in the form of new names coming to market or better pricing, in my opinion, a market reboot might be helpful in establishing a new base from which to move to higher levels.

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