Confusion as to how healthy the U.S. economy truly is and where interest rates are headed continues to drive volatility these days, especially in the equity markets. There is also concern, in my view, about the fixed-income markets, as rates have once again been driven lower. Municipals, as is typically the case, have mirrored the U.S. Treasury market and have generally posted positive returns year-to-date as of this publication.
As a follow-up to my prior post, municipal bonds continue to exhibit attractive characteristics. Here are some reference points we have used in the past that fairly represent the potential value of munis.
First, the taxable equivalent returns found in both investment-grade as well as high-yield municipals have continued to demonstrate the effect of the tax-exempt coupon and its impact upon returns. As demonstrated in the chart below you can see municipal returns over the last three-year period are lower versus the broad U.S. equity market, even on a taxable-equivalent basis. However the risk, as measured by standard deviation, was measurably less for municipals as compared to the S&P 500® Index.
As of December 31, 2014. Source: FactSet.
The second chart makes the argument that, although high-yield bonds nominally yield less than corporate high-yield bonds, these yields are still some 13 basis points above the long-term comparative average of the two which was 97% at yearend. This relationship continues to favor high-yield municipals over corporate high yield.
As of December 31, 2014. Source: FactSet.
What you need to know is that while uncertainty looms about the effects of a stubbornly slow U.S. recovery, the global implications of the plummeting current price of oil, and the sputtering Eurozone and Chinese economies, municipals, in my view, still embody a compelling and resilient asset class and have exhibited relatively low volatility during these uncertain times.
Index performance is not illustrative of Market Vectors ETF performance. Fund performance is available at www.marketvectorsetfs.com.