• Muni Nation

    Municipal Bond Market Outlook for 4Q'12

    Jim Colby, Portfolio Manager
    October 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*





    Barclays Municipal Bond




    Barclays Municipal High Yield Bond




    Barclays Municipal High Yield Long Bond




    Barclays Municipal High Yield Tobacco Bond




    Source: Bloomberg as of 9/28/12


    Triple-A MMD Yield Changes YTD**




    Change (bps)

    5 Yr (2017)




    10 Yr (2022)




    15 Yr (2027)




    20 Yr (2032)




    25 Yr (2037)




    30 Yr (2042)




    Source: MMD YTD as of 9/30/12


    Annual Muni Issuance Since 2000 as of 9/28/12
    Muni Chart
    Source: 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.




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    All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.

    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. 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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