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Municipal bonds have had a tough ride over the last few months. First there was the Fed’s taper shenanigans, which forced people to flee bonds on the threat of higher interest rates. Then Detroits bankruptcy hit the market, causing yet more outflows. Now we have Peurto Rico hitting the headlines for all the wrong reasons.
According to data from Lipper, investors have pulled nearly $44 billion out of municipal-bond funds so far this year. Whilst the average yield on high-grade municipal bonds has risen to 3.13% from 2.17% at the end of 2012, according to Barclays data.
But according to many portfolio managers, the selloff has created an opening for investors willing to seek out the strongest issuers and wager on improving municipal health as the U.S. economy expands.
Jim Evans, a portfolio manager with Eaton Vance, a leading muni-bond investment firm, told this months Barrons magazine:
“Investors have overreacted and worry that problems may be everywhere, there are definitely some difficulties, but the vast majority of credits are in good shape.”
To highlight the fact, both Moody’s Investors Service and Standard & Poors say there are currently 14 states which carry triple-A credit ratings. In contrast, only four U.S. companies have triple-A ratings from both rating agencies, and even the U.S. government lost its AAA rating from S&P in 2011.
According to Eaton Vance the fiscal situation at state level continues to improve with only a few exceptions — notably Illinois, which is grappling with an enormous unfunded pension obligations.
So there you have it, munis offer great value right now. So if you’re looking to invest, act now, before prices return to normal. But as Michael Aneiro points out, you might want to wait until all this debt ceiling business is sorted out first.
SacBee: – Puerto Rico Treasury announces final first quarter revenues. – $126 million increase in September revenues at closing, 1st quarter FY 2014 revenue collections increased by $88 million or 5.4% YOY, 1st Quarter revenues exceed budget estimates by $10.4 million.
FT: – Oppenheimer defends Puerto Rican bond holdings. – OppenheimerFunds, one of the largest managers of US municipal bond funds, has defended its commitment to holding Puerto Rican debt, despite falling prices of the territory’s bonds.
Investment News: – Galvin eyeing Puerto Rican muni debt obligations. – Massachusetts securities regulators have begun to make inquiries about the sale of Puerto Rican municipal debt obligations to investors in the state, with the office of Secretary of the Commonwealth William Galvin last Wednesday saying that it had sent inquiry letters to Fidelity’s FMR Co. Inc.; OppenheimerFunds, a unit of Massachusetts Mutual Life Insurance Co.; and UBS Financial Services Inc.
Income Investing: – Puerto Rico munis down 6.6% in October. – Prices of Puerto Rico bonds tracked in the S&P Municipal Bond Puerto Rico Index have plummeted in October, with the weighted average price of bonds in the index recently at 48.53, down 6.6% for the month to date and down nearly 25% for the year.
Barron’s: – Munis on the mend. – Despite ominous headlines about municipal bonds — given Detroit’s bankruptcy and Puerto Rico’s problems — most of the $3.7 trillion market is in excellent financial condition.
Learn Bonds: – What type of advisor makes sense? – Just as there are many different types of professionals in almost any field (doctor, lawyer, architect, builder), there are many different types of advisors. Once someone has a certain amount of experience, their knowledge base should be similar to other advisors in the same field. Each advisor will have based their personal philosophy on their own experience over time. Advisors have very different styles from one another and finding a match to not only the type of advice you need but a communication style is important.
ETF Trends: – The ABCs of bond ETF distributions. – Matt Tucker, iShares, Head of Fixed Income Strategy, looks at how bond ETF distributions work.
FT: – IMF says start of Fed tapering threatens $2.3tn bond losses. – Monetary tightening in the US threatens to expose financial excesses and vulnerabilities that could wipe trillions of dollars off bond markets, the International Monetary Fund warned on Wednesday.
BusinessWeek: – World keeps full faith in U.S. Treasuries if not politics. – Finance chiefs from nations holding more than $1.3 trillion of Treasuries signaled no plans to sell even as the U.S. faced condemnation for the fiscal fight plaguing the world’s largest economy.
Seattle Times: – Scott Burns: Beware the lure of long-term government bonds. – In a “normal” market — one that doesn’t have the Federal Reserve buying $85 billion a month in long-term debt instruments — the yield on long-term bonds could be much higher than it is now. This means prices would be lower. So that’s not a good parking spot.
Financial News: – Junk bonds push the needle for buyout firms. – The junk bond market was once used by private equity to add a little bit more leverage to transactions. But, nowadays, about half of all debt financings for buyouts come from high yield. Issuance is at a record high.
CNBC: – Maximizing fixed-income investing using alternative strategies. – With bond investors still skittish over interest rate risk, the search for alternative investment strategies that produce consistent income is on.
Reuters: – High yield investors pressured as flush corporates mop up junk. – Acquisitive investment grade corporates are starting to gobble up junk-rated issuers, taking their bonds out of circulation, which could increase pressure on European high yield investors to pick up weaker paper in the primary market.
Forbes: – What Yellen nomination means for emerging market investors. – The appointment of Janet Yellen to be the next leader of the US Federal Reserve should be good news for emerging market investors – in the short term. But unless some emerging nations make swift and urgent changes, things are going to get very ugly for them eventually no matter who is at the helm of the Fed.
Wealthtrack: – David Rosenberg has shifted his views on bonds. – Financial Thought Leader David Rosenberg is predicting a generational investment shift. The influential Chief Economist and Strategist at Toronto-based wealth management firm Gluskin Sheff recently reversed course on his long standing deflation and bullish bond theme. He believes Federal Reserve Chairman Ben Bernanke’s fight against deflation is working and that we are already seeing signs of inflation emerging and the economy strengthening beyond what most on Wall Street expect.
What Investment: – Retail bonds ‘not a low risk investment’, according to Rathbone analyst. – Whilst retail bonds as an asset class have considerable potential, there are concerns for private investors to consider before investing in them, according to Rathbone Unit Trust management’s head of fixed income, Bryn Jones.
ABC News: – How to decide if ultrashort-term bond funds are right for you. – As they anticipate the Federal Reserve’s eventual tapering of quantitative easing, investors worried about rising interest rates are wondering if they should hedge their bets on fixed income by putting money in ultrashort-term bond funds.
FT: – Sales of ultra-safe US covered bonds stall. – Six years after the US government first raised the possibility of writing new rules that would help US banks sell the special debt, that legal framework is no closer. When bankers and investors gather in New York this week for a conference about covered bonds in “the Americas” there is likely to be little excitement about the prospect of Washington – still in gridlock – creating new legislation for the debt.
Pendulum: – Bill Gross: How high does the 10-year yield need to go? – I have been writing about Bill Gross’ perspective on the 10-year yield over the last few months. His monthly commentaries and media appearances give some insight, but the Pimco Total Return Exchange-Traded Fund ETF (BOND), which is managed by Gross, gives a better view.
MarketWatch: – Bonds to stocks: pay attention. – There seems to be a universal belief that the moment a deal is reached in Washington, stocks will push to new highs. Yes, it is true that we are going to be entering the November-May period which is historically a seasonally positive period for markets, but I would argue that many cycles are out of sync in 2013. This could mean U.S. stocks actually surprise in a negative way into the end of the year. The bond market thus far seems to be of that opinion in what appears to be signs of stabilization following the historic yield spike from May to early September.
Month-to-date taxable high yield (HY) market has enjoyed slow down in new issues, stable #Treasury yields, and positive industry fund flows.
— Fixedology (@Fixedology) October 14, 2013
HY fund flows dominated by actively managed (82%) vs. ETFs (18%).
— Fixedology (@Fixedology) October 14, 2013
If the bond market was open, T-Bill yields would be soaring
— Chris Adams (@chrisadamsmkts) October 14, 2013