The municipal bond market steadily marched upward in 2014 and the S&P Municipal Bond Index ended up 9.26%.  The main ‘drama’ during the year came from the Detroit bankruptcy proceedings and wild swings of prices of bonds issued by Puerto Rico.

Overall, low new issue supply and relatively attractive tax-free yields certainly helped keep the supply demand equilibrium to the demand side.

Investment grade municipal bonds tracked in the S&P National AMT-Free Municipal Bond Index returned 8.92%.  In comparison, the S&P U.S. Issued Investment Grade Corporate Bond Index recorded a 7.71% return.

The S&P Municipal Bond High Yield Index returned it’s third highest return in 16 years ending up 14.6%.  Junk corporate bonds tracked in the S&P U.S. Issued High Yield Corporate Bond Index returned 2.65%.  The tailwind for high yield municipal bonds was fueled by rebounds in both the Puerto Rico bond market and the tobacco settlement bond sector.  The S&P Municipal Bond Puerto Rico General Obligation Index was up 15.27% and the S&P Municipal Bond Tobacco Index returned 16.15%.

Illinois wrestled with its pension obligations all year making headlines but it is general obligation bonds from New Jersey that underperformed the overall market.  The S&P Municipal Bond New Jersey General Obligation Index returned 3.7% significantly behind general obligations of other large issuers such as California (10.59%) , Illinois (9.63%) and New York (6%).

Not a bad year for municipal bonds.  Boring is good.

This article was written by J.R. Rieger, global head of fixed income, S&P Dow Jones Indices.

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