The Best Defense is a Good Offense

This somewhat hackneyed reference to an athletic strategy might actually be one way to express an opinion that answers how investors might choose to approach their municipal portfolios over the remainder of the year.

With October having come to a close and municipal bond performance up 8.32% year-to-date as of October 31, as measured by the Barclays Municipal Bond Index, investors may be tempted to close the books and wait out the end of the year. With volatile equity markets, uncertainty surrounding the timing of the Federal Reserve’s decision to allow rates to rise again, and headlines trumpeting conflict and disease, it might indeed be tempting to do nothing.

Source: Bloomberg.

However, I hasten to say that playing defense does not strike me as a prudent strategy; the underlying elements that have driven performance so far this year are likely to remain in place through the next two months, at the very least. Thus, investors may benefit from sticking to a good offensive game plan by building tactically upon core holdings in high-yield and investment-grade intermediate munis. This potentially offers income from high-yield and the benefits of roll down1 from intermediates which may allow one to build upon possible gains, even in the face of unknowns.

Back to the title line: Even though we are in the fourth quarter of the year, we want to finish strong with a sound game plan and good performance. I believe that an allocation to the municipal bond asset class so far this year has proven to be a good move that I personally would not abandon at this point in the game.

1As a bond approaches maturity it will gradually “roll down the curve” toward lower yields each year as it moves closer to maturity. As this occurs the bond will be valued at successively lower yields and thus potentially higher prices as it gradually moves down the yield curve. This strategy may help protect principal in a rising interest rate environment and allow an investor to capture higher yields. This strategy works best when the yield curve remains upward sloping and when rates rise less than the markets are predicting. Conversely, if yields rise by the full amount that the markets predict, the benefits of this strategy could be zero.

The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years.