In the past I have referenced "headline risk" as a market impediment to which the municipal market seems inexorably tied. The municipal market still appears, to me, unable to shrug off the wet blanket of concern that most recently has taken cash away from muni assets and pushed yields higher. See the tables below; in my view, the Barclays Municipal Bond Indices demonstrate that the increase in yields may have caused negative returns for the month of May.
"AAA" MMD Muni Yields % (as of May 31, 2013)
5 YR (2018)
+ 20 bps
10 YR (2023)
+ 40 bps
15 YR (2028)
+ 35 bps
20 YR (2033)
25 YR (2038)
+ 36 bps
30 YR (2043)
+ 38 bps
Source: Mesirow Financial, Municipal Market Data (MMD)
Barclays Muni Index Performance % (as of May 31, 2013)
Last 3 MOs
Muni Bond Index
Muni 10 Year Index
Muni High Yield Index
I have also spoken in the past about the technical aspects of reinvestment opportunities: modest new issue supply; a renewal of demand based upon higher marginal tax rates and large amounts of cash generated from coupon payments, bond maturities and calls. I believe these technicals remain very much in place and may support a sound finish to second quarter results. In my view, because municipals are not generally well understood, even the slightest dent in the armor can cause hesitation. I believe this has recently occurred. Now that headlines are trumpeting the notion that the Federal Reserve may raise rates this year, the ardor for municipals appears to have cooled.
As coaches instruct their charges during half-time breaks, there is still a lot of game left to play. Much as they did in the second half of 2011, I believe municipal bonds now have many fundamental reasons to potentially turn around before the year is through. I will discuss some of these considerations in future commentaries.
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 Municipal 10 Year Index is a subset of the broader index. The Barclays Municipal High Yield Index is considered representative of the broad market for below investment-grade, tax-exempt bonds with a maturity of at least one year.
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Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
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