We have had good performance on the books so far in 2014 (as of 3/31/2014), and it’s a bit of a surprise because we came off of a difficult year in 2013, right up to the end of the calendar year in December. The turnaround was remarkable. Performance has been good, in part, because cash has returned to mutual funds and exchange-traded funds. Supply, the amount of new issues in the municipal marketplace, has been reduced and is down significantly from what we are used to seeing, particularly in the months of February and March. With that backdrop we have already put up some very decent numbers for munis. Furthermore, if the Obama administration is going to leave any kind of a legacy with tax reform or balancing the budget, taxes inevitably are going to be higher, and that means the value of the municipal tax-free coupon will be a dominant theme for investment advisers going into the second half of 2014.
High Yield
So far this year (as of 3/31/2014), in addition to general performance gains in the municipal marketplace, high yield has rallied for a couple of reasons. Last year assets left the industry and assets left many of the high-yield funds, creating an oversold condition. My view is that going into the end of this first quarter and into the second quarter of 2014, investment advisers and other institutional investors may recognize this oversold position and, looking at the relative valuations of high-yield to investment grade, may conclude that the valuation is there. The yield that’s delivered right now in the high-yield spectrum is equivalent, if not greater than that of any other high-yield product that you’re going to find in fixed income.
This article was written byJames Colby, Portfolio Manager and Senior Municipal Strategist, responsible for Market Vectors municipal bond investments.