Colby is Portfolio Manager/Municipal Bond ETFs with more than 30 years of fixed income experience.
The various "cliffs" that we, and virtually the entire business community, have discussed and feared since last November, seem to have appeared suddenly and viciously, sending markets careening toward the fog of uncertainty. The market fall of the past five business days not only took many professionals by surprise, it seems to have cast the outlook into a curious state of confusion. I say that because, prior to the announcement (misinterpreted, in my opinion) last week by the Fed, economists and strategists were generally in agreement on the outlook for the markets and economic growth. Now, those views seem to me to be as difficult to grasp as a handful of Maine fog. Everyone has an opinion about why or what has happened. Uncertainty, however, is a mighty force which, in the case of muni investors, may cloud decision making. I offer what I consider to be some fog-piercing data points below that I hope make clear some essential realities muni investors can use to rebuild confidence.
I believe all of the above suggests that now is NOT the time to abandon municipals as a core strategy.
1Consumer Price Index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. AAA yield minus CPI equals inflation-free income. Source: Bloomberg as of 5/31/13. 2AAA Municipal Market Data (MMD) curve as of 6/21/13. The municipal to Treasury ratio is a comparison of the current yield of municipal bonds to U.S. Treasuries indicating whether municipal bonds offer attractive yields compared to Treasury yields. If the ratio is below 100%, municipal bonds are yielding less than Treasuries; if the ratio is above 100%, municipal bonds are yielding more than Treasuries.
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