Rekindled Demand As We Roll Into A New Year
- Wednesday, 01/11/2012
- Demand for munis strong as we move into the new year
- Calendar "roll" likely to benefit intermediates most: 6-16 year bonds
- Modest expectations for overall muni performance in 2012
The January effect — coupon payments and maturing bonds — are fueling muni demand despite sharp volatility in U.S. Treasuries. The technical offset to the "real" market, however, is the "roll" which occurred at the first of the year. For example, bonds that were classified as 15-year maturities on 12/31/11 were reclassified as 14-year maturities as of 1/1/12.
The "roll" means that the value (yield) of these bonds is now based on a shorter number of years to maturity. Since the difference in yield between 15 and 14 years right now is approximately 14 basis points, the reclassified bond receives a one-time performance boost to higher prices just by standing still (remember: price and yield have an inverse relationship). I expect that intermediates are likely to be the biggest beneficiary of the "roll" because the yield curve has been steepest among these maturities: 6 to 16 years.
My expectations for performance of the broad municipal market in 2012 are modest. Hence, attention to portfolio duration1 and the eventual modification of interest rate policy by the Federal Reserve beg a revisit to the definition of "duration." This impacts how clients should think about positioning on the yield curve for their muni exposure.
The Shape of the Muni Curve: Where is the Opportunity?
†Source: Municipal Market Advisors (MMA) as of 1/10/12. This chart is for illustrative purposes only. Historical information is not indicative of future results; current data may differ from data quoted.
1"Duration" is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.