I believe 2014 will be described as a rousing success in a variety of ways. The results were unexpectedly rewarding for municipal bond investors. Some may be wondering, “What now?”
Keep in mind that we begin this year in a very different place than where we were last January. Most significantly, at yearend the 30-year bond on the Municipal Market Data (MMD) yield curve had adjusted downward from 4.19% to 2.86%, a fall of 133 basis points since the end of last December. Similar to last year, however, we begin the calendar with uncertain expectations. What will the Federal Reserve do and when? Will the U.S. economy show more than uneven and uncertain improvements? Will economic slowdowns in Europe and China continue to prompt “flights to safety” into U.S. Treasuries, pulling potential positive performance from municipals?
What We Need To Know
So far the supply and demand imbalance that helped drive last year’s strong muni performance is still in place. There continues to be reinvestment demand in the form of cash arriving in client accounts from coupon payments, maturities, and bond calls that generally help buoy the market, while issuers appear to remain reluctant or possibly unable to fill that demand with additional new supply. With the municipal bond curve positively sloped, there may be income earning opportunity to be had while overall credit quality continues to improve. The after-tax comparison, which we will detail in the next MUNI NATION, currently favors municipals over taxable bonds. With a proper diversification strategy, investors should consider the asset class in 2015.
The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays High Yield Municipal Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years.