• Muni Nation

    For What It’s Worth

    Jim Colby, Portfolio Manager
    June 14, 2013

    The Buffalo Springfield song refrain, "…what's that sound, everybody look what's going down" applies as much to the financial markets of today as it did to life in 1967. We seem to have reached a tipping point where investors and traders are intent upon stealing the Fed’s thunder and have begun to drive interest rates higher on their own. In my view, bearish talk and sentiment have led to the selling of mutual fund shares, which has led to the selling of cash bonds, pushing prices lower and yields higher. Because a large portion of the muni market is owned by retail investors who are sensitive to these issues, mutual fund and ETF price declines have the potential to force even more selling.

    "What’s going down" is more than just prices. I believe several factors are likely at work in pushing this anxious market to act before the news is actually on the tape: a sea change in overall sentiment, talk of the rotation out of bonds into stocks and the subsequent performance of these securities and, lastly, the possibility that the Fed will scale back its quantitative easing policy. Where does this leave concerned investors?

    As often happens during times of market volatility, corrections — dramatic changes in market direction evidenced by great price changes — are very often overdone. Momentum in this type of market may be difficult to stop and generally overshoots reasonable endpoints. Let's not overlook the fact that, in my view, these higher taxable equivalent yields may some time in the future look attractive versus equities and corporates once more. The seasonal technicals governing the positive outlook for near-term demand are still in place. I am not the only one suggesting that this is not the time to abandon the baseline philosophy that municipals should remain prominent in one’s portfolio.

    Index/Bond Table

    Source: FactSet, as of 6/11/13.

    *12-month dividend yield: 12 month dividend per share/price.

    **Yield to worst or the lowest of either yield-to-maturity or yield-to-call date on every possible call date.

    Indices listed are unmanaged and not a security in which an investment can be made. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sectors. The S&P 100, a subset of the S&P 500, includes 100 leading U.S. stocks. Constituents of the S&P 100 are selected for sector balance and represent about 57% of the market capitalization of the S&P 500 and almost 45% of the market capitalization of the U.S. equity markets. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The U.S. Aggregate Index includes government securities, mortgage-backed securities, asset-backed securities and corporate securities to simulate the universe of bonds in the U.S. market. 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.

    Taxable equivalent yields (TEY) are used by investors to compare yields on taxable and tax-exempt securities after accounting for federal income taxes. TEY represents the yield a taxable bond investment would have to earn in order to match, after deducting federal income taxes, the yield available on a tax-exempt municipal bond investment. TEY = Tax-Free Municipal Bond Yield/(1 -Tax Rate).




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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.

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