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Muni bonds have suffered the summer from hell, down 1.6% in August alone, the steepest drop for the month in 14 years, according to data from Bank of America Merrill Lynch. This comes on the back of $20 billion of withdrawals from muni mutual funds so far this year, largely driven by Detroit’s bankruptcy and fears the Fed will start to slow the level of bonds it purchases as part of its quantitative easing program.
But every cloud has a silver lining and this cloud is no different, the sell-off has created an opportunity for munis. Brian Chappatta from Bloomberg reports that benchmark yields have risen to their highest level since 2011 and currently exceed those of Treasuries and AAA company debt by the most in at least 20 months.
The last time munis were at that level, back in 2011 and 2012, they went on bit of a tear. Add to that September is traditionally a good month for munis, posting advances in 15 of the last 24 years. All of which makes muni bonds an attractive proposition right now.
But not so fast, Benjamin Thompson, chief executive officer of Samson Capital Advisors, which oversees about $6 billion in local debt told Bloomberg.
“Munis are more attractive than they’ve been for a period of time, but negative investor flows are preventing the market from seeing any significant rebound,”
And Chris Alwine, head of munis at Vanguard Group Inc. said.
“We expect higher volatility, which goes hand-in-hand with cheap valuations, ultimately, that cheapness relative to other fixed-income assets should come out of the market, but that may take some time to be realized.”
So muni bonds are set to rebound, it’s just a question of when. To get a better idea of timing we need to go back to 1999, the last time munis declined in both July and August. That year munis extended the slide into September and October, losing 0.7% and 2%, respectively.
According to Alwine. “That could be the case again this year as investors grapple with bankruptcy proceedings in Detroit and President Barack Obama’s plan to pick a Fed chairman to succeed Ben S. Bernanke.”
Todays Other Top Stories
FT: – Rush to U.S. debt markets ahead of jobs data and Fed meeting. – Big companies are rushing to the US debt markets this week, trying to lock in borrowing costs at low levels before a possible jump in rates and ahead of important jobs figures and a Federal Reserve meeting.
ETF Trends: – Fight rising rates with international, short-duration bond ETF. – The biggest losses since 1999 for municipal debt signal that Detroit’s bankruptcy and 14 weeks of withdrawals from mutual funds are overwhelming historical trends pointing to a rebound in the $3.7 trillion market.
Learn Bonds: – How to avoid Ackman’s JC Penney mistake. – Hedge fund manager Bill Ackman’s fund Pershing Square recently sold its shares of JC Penney for an approximate 50% loss of nearly $500M. While the overall market has enjoyed significant upward momentum, Pershing Square seemingly picked the wrong company, JC Penney, at the wrong time, $25 a share in 2010.
Ian Wyatt: – Why you’re probably not protected from the bond bubble. – Is your portfolio adequately protected from rising interest rates and a bond bubble?
Anthony Valeri – LPL Financial: – Taper or no taper. – Either way, the bond market has already gone a long way to price in a more aggressive Fed.
MarketWatch: – 5 ways to prepare for higher interest rates. – While many questions remain unanswered, one thing is painfully clear: The current course of rock-bottom interest rates can’t last forever. So it’s not so much a question of “if” tighter central bank policy will hit, but when. That gives investors an opportunity to be proactive about their portfolio right now, in anticipation of higher interest rates.
MarketOracle: – Bond markets offer no protection from stock market risk. – Two months ago, Federal Reserve Chairman Ben Bernanke said he was puzzled by the upward surge in Treasury yields. And bond yields are even higher now, reaching a two-year high on August 15. But the rise in bond yields – and the concomitant drop in bond prices since they move inversely to yields – is no surprise to EWI analysts.
Cate Long: – A fund manager looks over muniland. – Cate Long chats with with Jeffrey Elswick of Frost Investment Advisors’ Total Return Bond Fund about the current state of play in muniland.
MuniNet Guide: – Does the ACA pose a health risk to state finances? – Chris Mier, CFA, Managing Director of Loop Capital Markets Analytical Services Division, explains that the Act has the potential to significantly impact state economic growth and credit quality. It also raises concerns over the future of the cost-sharing equation.
FT Adviser: – Foster takes profits on bond yield ‘peak’. – Artemis’s James Foster has removed positions in his portfolio which would benefit if government bond yields in the US and UK continued to rise.
Fundweb: – What, no rush for the bonds exit? – There have been steady outflows from retail bond funds over the past eight months, but the evidence of the latest FE AFI rebalancing is that recent volatility has left panelists unmoved.
FT: – U.S. telecoms bonds fall in anticipation of issuance. – Verizon Communications’ $130bn purchase of Vodafone’s Verizon Wireless stake is driving telecommunications bonds lower as the US corporate debt market prepares to absorb billions of dollars in new securities.
Reuters: – Fitch may upgrade Nokia debt rating after Microsoft deal. – Credit rating agency Fitch said it may upgrade Nokia’s speculative-grade debt rating after the company announced the sale of its handset business to Microsoft.
Bloomberg: – Corporate bond sales dented by rising bond yields. – Bloomberg’s Alix Steel looks at the impact of the quick hike in corporate bond yields as sales of corporate bonds hit the lowest level in two years in the month of June. She speaks on Bloomberg Television’s “In The Loop.”
ETF Trends: – Short-duration TIPS ETFs limit rising-rate damage. – Tame inflation and rising interest rates have been tough on bond ETFs that invest in Treasury Inflation Protected Securities, or TIPS.
Income Investing: – Look to buy 15-yr munis, beware De Minimis rule. – The ongoing muni-market rout has pushed long-dated muni bond yields above their ten-year averages, while buy-and-hold investors should look at higher-coupon munis of roughly 15-year maturities. Those are among the observations of Justin Hoogendoorn and Brett Adlard of BMO Capital Markets in their survey of the muni market today.
Gross:Tapering nearly a sure thing. BigQuestions:Mtges orTreas? How much? Increased guidance? We say 10blnTreas w frontend friendly guidance
— PIMCO (@PIMCO) September 4, 2013
PIMCO Total Return lost 14% of assets in the past four months
— no bid. (@cr3dit) September 4, 2013
So many 5 coupon munis at par these days… Unthinkable a few months ago
— David Schawel (@DavidSchawel) September 4, 2013