• Muni Nation

    Road Map

    Jim Colby, Portfolio Manager
    April 27, 2012
    • According to S&P®*:
    • - Upgrades of muni bonds outpaced downgrades 121 to 83 in Q1 2012.
      - Credit quality in U.S. public finance appeared to stabilize overall in Q1 2012.
      - The gulf between stronger and weaker credits may grow in some sub-sectors.
    • Depending upon whose definition you use, between 6 and 17 issuers "defaulted" in Q1 2012, about the same number as in Q1 2011.
    • S&P revised its outlook to positive from stable for California — one of the three largest U.S. issuers of municipal bonds.
    • The Federal Reserve Board has clarified that the Volcker rule will not take effect until July 21, 2014.

    With flows continuing to favor municipals, BBB-rated munis are receiving recommendations as their spreads to investment-grade muni bonds continue to compress. Even in a rising rate environment, the less volatile BBBs have historically outperformed investment-grade munis and have provided a potential cushion to a diversified portfolio.

    Historically, May and June have been strong months for municipals due to reinvestment opportunities. Yes, I expressed that same theme at the end of 2011, but I continue to see some slack in new issuance, setting the stage for a continuation of the positive relationship between demand and supply.

    I still see some soft spots in the road ahead, specifically with some smaller, local municipalities, but with modest expectations, I believe we should be able to comfortably reach the end of next quarter.

    *S&P® (Standard & Poor’s) is a third-party rating agency that assesses the credit quality of municipal and other bonds.




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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. 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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