Tips for Investors
Against this backdrop, we’d offer a few key recommendations for investors:
Observe the curve. Yield curve positioning will be very important in 2015. The short end will be harder hit as the Fed raises rates. Greater value and lower volatility can be achieved further out. We like the 12- to 17-year area.
Hold onto high yield. High yield munis did even better than the broader muni market in 2014, but I still have a hard time poking holes in the investment case. Investor thirst for income is high, which suggests continued demand for high yield munis. There’s also limited supply. Taken together, that makes for a favorable equation.
Avoid the extremes. Don’t take on more risk than you can stomach, either by extending too far out on the curve and/or by taking excessive credit risk. At the same time, don’t get too defensive. There’s no value to be gained in exiting the market and holding cash today.
Use flexible fixed income. BlackRock is urging investors to rethink their bonds in 2015, and part of that means using flexible fixed income strategies to guard against interest rate risk and credit events, while also enhancing the diversification of your fixed income portfolio. In the tax-exempt space, we recently supplemented our Strategic Municipal Opportunities Fund with a new state-specific option in California.
In closing, I’d like to offer one final thought on this idea of perfection: It’s overrated … and it’s subjective. I enjoyed what munis had to offer in 2014, but I expect continued good things from the asset class in 2015. (But if you’re still counting, one month down and “perfect” so far.) I invite you to read my fuller 2015 outlook and to check out our monthly municipal market updates to keep up on market performance and events throughout the year. Happy 2015!
Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog. You can find more of his posts here.