The municipal market has been receiving a great deal of mostly hard-earned attention in all sorts of media venues this summer. Possibly the spotlight will enlighten an investing population on how tightly woven municipal bonds are to the broad fabric of our country’s growth and well-being. These are some of the issues that have come into focus:
- Puerto Rico’s current fiscal and financial troubles and credit downgrades;
- The nation’s failing infrastructure and funding woes;
- The emergence of the rising burden of pension obligations for states and municipalities;
- The near failure of the political process in state and local government (such as Illinois) to reach a budget accord to meet its obligations.
In our view, the success of municipal finance is becoming clearer with each new article discussing these and other points. It would appear that there is no summer escape to a quiet paradise for anyone involved in this asset class.
Amidst all the discussions it is instructive to note that I believe the market itself is resilient. Investors have not deterred from allocating a great deal of cash to municipals for reinvestment. Actually, despite the increase in the pace of newly issued bonds year-over-year (we are already at 78% of the 2014 total) and the recent outflows emanating from mutual funds (mostly individual investors and separately managed account platforms), investors appear to continue to consume available supply. As pointed out to me by a leading municipal securities dealer firm, the buy-to-sell ratio for its retail market has consistently been at 2.5% to 3%, which to me has historically indicated healthy demand for the municipal asset class.
Despite the intrusions of the important issues mentioned above, the market seems to receive continued support and interest from investors. As noted in her recent commentary from July 27, Natalie Cohen, Head of Municipal Research at Wells Fargo, reminds us that despite the image that mutual funds currently present, they held only 28% of outstanding municipal securities as of the end of 1Q’15. The household/retail sector still dominates with 42% ownership, also as of the end of 1Q’15. In my view then, the market remains on solid footing with the household sector taking us through potentially challenging times.
James Colby is a portfolio manager and senior municipal strategist at Market Vectors ETFs.