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End Of May, Don't Go Away - Thursday, 05/31/2012

I've taken a little liberty with a familiar saying to suggest that for municipals, I am not booking my three-month summer vacation just yet. Month-to-date and year-to-date performance of all muni high-yield bond sectors (with the exception of tobacco) has been positive. The technicals of demand overpowering supply, which I've previously written about, are still in place.

The table below lists the six states with the largest June 2012 cash flows1 into munis.


 June 2012
Actual Cash Flow

 June 2011
Average Cash Flow

New York



New Jersey 















Source: Siebert Brandford Shank & Co. Municipal bond calls as of 5/25/12. Subject to change as more bond calls are announced. 

The municipal market appears to be looking for evidence of improvement of any variety. I believe that:

  • Larger cities and states have weathered the slow recovery relatively well; at least well enough to convince investors that potential value resides in issuers rated BBB as compared to those rated AAA.
  • This is evidenced by the yield spread of the Barclays Municipal Bond BBB Index to Barclays Municipal Bond AAA Index, which continues to narrow from 233 basis points on 4/30/12 to 217 basis points as of 5/25/122.  
  • The smaller issuers, who may have fewer resources or options than larger issuers, are, in my opinion, less likely to command the same attention. The current predicament faced by the nation is that there may be few solutions in an election year that Washington is willing to pursue. As the refunding of outstanding debt and the careful management of budgets have continued to give relief to smaller issuers, it is worth noting that ratings agencies have yet to raise warning flags for this class of issuers.

1Cash flow is the sum of maturities, coupon payments and bond calls. This is considered representative of money available for reinvestment back into municipal bonds at a given time.

2The Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Municipal AAA, BBB and High-Yield Bond Indices are subsets of the broader index.




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