At the risk of sounding like a bulge bracket drum beater, recent events, including the resignation of Bill Gross from PIMCO, beg for some clarity in so much as municipals have generally continued to generate respectable returns so far this year.
Last week the muni market assimilated some large and needed supply, notably two $2 billion new issues: one from California and the other from New York. Each one was met with strong demand, and as the syndicates closed the bonds traded higher (in price) in after-hours trading. Possibly in anticipation of the new supply, municipal bond yields finished the week lower than where they began.
As of last Friday, Bank of America Merrill Lynch had calculated that issuance was still down 9.09% compared to this same time period last year. While according to Lipper data, investor inflows into muni mutual funds and ETFs were again positive for the week amounting to $588 million (although inflows year-to-date are approximately $16 billion, which is well short of the $68 billion that left municipal funds in 2013).
This theme continues to, in part, explain both the performance and potential opportunity perhaps present in the municipal asset class.
Much has been said about the recent comments from the Federal Reserve and the winding down of its bond purchase program that may signal a sooner-than-expected rise in interest rates. Mixed U.S. economic indicators, however, have recently suggested that growth is not turning higher, thus lending support to U.S. Treasuries and municipals.
The resignation of Bill Gross generally appeared to affect fixed income assets, as evidenced by the market’s reaction. Municipals are a small portion of PIMCO’s total assets under management, and although it’s not expected, we’ll keep our eyes on possible outflows from PIMCO’s open- and closed-end muni funds. I anticipate a generally muted impact to the overall municipal bond market.