The evidence that the muni market was open for business in August is shown in the numbers below. According to Municipal Market Advisors (MMA) data, in the long end of the curve, investment grade muni yields fell by 27 basis points (bps) from the end of July to the end of August. For the same time period, the Barclays Municipal Bond Index was up 1.21%, the Barclays Municipal Long Bond Index was higher by 1.86%, and the Barclays Municipal Bond High Yield Index was significant, advancing 3.13%. This provides us with some potentially crowd pleasing year-to-date results (total returns) for the three benchmarks of 7.47%, 12.37%, and 11.59% respectively.
Source: Bloomberg. Data as of 8/31/14
It is unclear which geo-political or economic elements are going to emerge that may shape the markets as we head into the final months of the year, but it appears that the themes below have been some of the primary drivers of these results this year:
- Low supply of newly issued bonds
- Strong cash flow from maturities, calls and coupons
- De-risking out of international debt pushing Treasuries higher
- Taxable equivalent yield advantage of munis versus other fixed income
- The isolation of “credit troubled issuers” such as Detroit and Puerto Rico from the broader market
With definitive action on the part of the Federal Reserve potentially months away, the municipal bond asset class continues to enjoy investor attention and asset in-flows.
Source: Morningstar Direct. Data as of 8/31/14.
The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays Municipal Long Bond Index is a subset of this broader index and covers investment-grade municipal bonds with a nominal maturity of 22 years or more. The Barclays High Yield Municipal Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years.