• Muni Nation

    Munis: Halftime Perspective

    Jim Colby, Portfolio Manager
    July 16, 2015

    We have crossed over into the second half of the 2015 calendar year and with that, it is an academic—but instructive—exercise to see where we have been and how we have performed. Because the thesis of this post is that investors are flush with cash from a variety of sources, I hope to make the point that they will have ample opportunity to deploy that cash into a muni market that is more welcoming than at the first of the year.

    Let's Review the Data  

    The total return for the Barclays Municipal Bond Index for the first six months of the year ending June 30 was 0.11% and for the Barlcays High Yield Municipal Bond Index it was -1.92%. Issuance of municipal bonds was higher by 3.30% year-over-year and outflows, as indicated by The Investment Company Institute (ICI), accelerated through the end of June, contributing to negative headlines and volatility in fixed income markets. Nevertheless, municipals managed a slight gain despite prevailing sentiment.

    The table below makes it clear that whether the rate rise was anticipatory of a Federal Reserve (“Fed”) move or in response to market conditions, investors will be rewarded for their patience with an opportunity to garner nearly 50% more yield from muni income products than was available at the start of the year.


    Investment Grade Municipal Yield Curve Changes


    Maturity 12/31/2014 6/30/2015 Change
    5 Year 1.32% 1.38% 6 basis points
    10 Year 2.04% 2.28% 24 basis points
    15 Year 2.33% 2.77% 44 basis points
    20 Year 2.58% 3.01% 43 basis points
    25 Year 2.77% 3.20% 43 basis points
    30 Year 2.86% 3.28% 42 basis points

    Source: Municipal Market Data (MMD) as of June 30, 2015.  


    By every measure ( see post from Thursday, 05/28/2015) I believe cash available for reinvestment in muni portfolios will continue to outstrip new issuance through the summer months (negative $5 billion-$10 billion), setting the stage for a potentially stronger finish, in which demand surpasses supply, to the calendar year-end. This scenario is not too dissimilar to that of 2013-2014, when good performance emerged at the end of the 2013 year.

    Finally, another backward-looking but positive longer term sign for the muni market: According to Smith’s Research & Gradings, the major agencies that rate municipal debt upgraded 447 issuers while downgrading 402 during the first six months of 2015. By comparison, in 2014 upgrades versus downgrades were 988 to 682, respectively. The inference drawn from these numbers is that the underlying economic environment is improving for those municipalities that issue debt. This is good news for investors who should be encouraged to know that credit quality continued to improve broadly across the spectrum of municipal bonds.



    Post Disclosure

    The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The Barclays High Yield Municipal Bond Index is considered representative of the broad market for below investment grade, tax-exempt municipal bonds with a maturity of at least one year.


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