Municipal Bond Market Outlook for 4Q'12
- Friday, 10/12/2012
Muni index performance has generally been good this year.
- Falling yields have contributed to positive returns year-to-date.
- Through September, municipal mutual funds and ETFs have witnessed 43 consecutive weeks of positive cash inflows.
- Only recently has supply begun to accelerate and approach the more normalized patterns of the past 10 years.
- I believe the continued value proposition embedded in municipal yields — nominally higher than those of treasuries — has attracted both individual and institutional buyers.
- Re-investable cash in the form of "called away" bonds, coupons and maturities has propelled performance through the end of the third quarter and is, in my opinion, likely to continue to drive demand in the fourth quarter.
I believe we can expect continued good performance but with the following two caveats: (1) political risk in the form of potential changes to, or elimination of, the tax-exempt nature of municipal interest, and (2) credit deterioration resulting from weak underlying economics. Either could have an adverse impact on the market.
Municipal Bond Index Performance*
Source: Bloomberg as of 9/28/12
Barclays Municipal Bond
Barclays Municipal High Yield Bond
Barclays Municipal High Yield Long Bond
Barclays Municipal High Yield Tobacco Bond
Triple-A MMD Yield Changes YTD**
Source: MMD YTD as of 9/30/12
5 Yr (2017)
10 Yr (2022)
15 Yr (2027)
20 Yr (2032)
25 Yr (2037)
30 Yr (2042)
Annual Muni Issuance Since 2000 as of 9/28/12Source: Thomson Financial; *BofA Merrill Lynch Global Research forecast through end of 2012.
*The Barclays 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 High Yield Bond Index is considered representative of the broad market for below investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Municipal High Yield Long Bond Index and Barclays Municipal High Yield Tobacco Bond Index are a sub-set of this broader index.
**MMD provides a broad range of benchmark data and technical/fundamental analysis to the municipal market. Their analytical services offer a unique perspective on the municipal bond market, highlighting key areas of value and opportunity.