- Wednesday, 02/08/2012
- January's gains mark strong start to the year
- $6 billion inflows in January fuel rally
- Moody’s and S&P differ on credit outlook for state and local governments
Returns for municipal bonds YTD in 2012 represents third strongest start to a year since 1990 (2.31% YTD as of 1/31/2012)†. Investors are rushing back to municipals as evidenced by strong inflows of $6 billion in January. A combination of factors are boosting investor demand: a lower supply of muni bonds given the tepid new issuance calendar, and renewed acceptance of munis as a harbor of credit quality and liquidity. Also, persistent headlines on Europe’s troubles continue to pressure investors to seek safety in U.S. Treasuries, which in turn supports municipal bond returns.
Cash available for reinvestment in the muni bond market continues to provide opportunities for fund managers looking to grab market performance through the first quarter of 2012. Despite the lofty price levels achieved YTD (and inversely, the low absolute yields), I believe investors will target any perceived price weakness as an entry point. Investor interest is likely to be generally focused further out on the curve where yields are higher, and credit quality is lower.
Credit quality in the muni bond market continues to be a topic of discussion and debate. A survey of states reveals an uptrend in revenues, consistent with a view of economic improvement at the national level. However, because local governments rely heavily on property taxes and state aid, it is curious to see a divergence in the credit outlook by the credit rating agencies: Moody’s Investors Service and Standard & Poor’s. Moody’s outlook remains negative in 2012 for the fourth consecutive year, while S&P’s outlook is more optimistic.
†As measured by the Barclays Capital Municipal Bond Index. The 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.