Colby is Portfolio Manager/Municipal Bond ETFs with more than 30 years of fixed income experience.
For all the professionals who embraced the strong market performance of municipal bonds year-to-date, I attribute the sudden break in the positive trend to the confluence of the following events leading to what could be called a "muni perfect storm":
Munis gave up more ground again on Monday as more selling emerged from a cross section of investment portfolios. (See graph below.) Some seemed intent on off-loading more Puerto Rico issues, while others appear to have used the current market weakness as an excuse to step aside while the "compromise dance" continues on in Washington. Several well-known strategists have furthered the notion that the benefit from the tax-free coupon of municipals may either disappear or be aggregated into a "cap" on certain deductions (28% being the line that has been drawn in the sand). I see little likelihood that prior ownership and income will be grandfathered through new legislation, because the cash needs are dire and the result of capping only new issuance would likely result in insufficient tax revenue in the near term.
Municipal Bids-Wanted Hit Highest Level Since January 2011*
Simple Moving Average
Source: Bloomberg. The J.P. Morgan MBWDPAR Index represents the total dollar amount of wanted items on Bloomberg's buyside bids wanted system.
*Bid Wanted is the process by which an investor or broker-dealer actively solicits bids on a position of securities from the marketplace.
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