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The second quarter of 2014 is likely to differ from last year in a couple of significant ways. We had positive momentum build in the first quarter of 2014; hopefully it will continue. What we may not have to worry about in 2014 is tapering, or the sudden rise of interest rates that occurred last May and June and threw the fixed-income markets into disarray. Now we have a scenario where we believe the Federal Reserve is going to modestly adjust its quantitative easing and provide us with a stable platform going forward with respect to interest rates. Fed PolicyWhat the Fed does in this next quarter matters because of expectations. Fixed-income markets were thrown into disarray last year because of the Fed's prospects of tapering, i.e., the removal of a certain amount of quantitative easing from its policies. What the Fed does under Janet Yellen in the second quarter of 2014 will go a long way to determine whether we have stability in the fixed-income markets for the remainder of the year. Fed policies are key not only to the United States, but also to global stability in terms of fixed income.
2014 PerformanceWe have had good performance on the books so far in 2014 (as of 3/31/2014), and it's a bit of a surprise because we came off of a difficult year in 2013, right up to the end of the calendar year in December. The turnaround was remarkable. Performance has been good, in part, because cash has returned to mutual funds and exchange-traded funds. Supply, the amount of new issues in the municipal marketplace, has been reduced and is down significantly from what we are used to seeing, particularly in the months of February and March. With that backdrop we have already put up some very decent numbers for munis. Furthermore, if the Obama administration is going to leave any kind of a legacy with tax reform or balancing the budget, taxes inevitably are going to be higher, and that means the value of the municipal tax-free coupon will be a dominant theme for investment advisers going into the second half of 2014. High Yield
So far this year (as of 3/31/2014), in addition to general performance gains in the municipal marketplace, high yield has rallied for a couple of reasons. Last year assets left the industry and assets left many of the high-yield funds, creating an oversold condition. My view is that going into the end of this first quarter and into the second quarter of 2014, investment advisers and other institutional investors may recognize this oversold position and, looking at the relative valuations of high-yield to investment grade, may conclude that the valuation is there. The yield that's delivered right now in the high-yield spectrum is equivalent, if not greater than that of any other high-yield product that you're going to find in fixed income.
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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.
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