Although summer is not yet over, the “vacation” that many investors seem to have taken with respect to their muni investment perspective may well be coming to an end.
The timeline leading up to the summer months included headline-generating withdrawals from mutual funds and a calendar of newly issued bonds that may push the 2015 yearend totals beyond those of last year. Even though rates were pushed higher by these elements and concerns for Puerto Rico and Illinois, the apparent reticence of investors to engage seems to have created a better landscape for buyers of municipals now than earlier in the year
I believe this 2015 summer of discontent should now be viewed in the context of opportunity, not avoidance.
It should be clear that the vast diversity of the marketplace appears to have remained little changed by the select and unfortunate affairs plaguing the governments of Puerto Rico and Illinois. It should also be clear that whether it is the devaluation of the Chinese Yuan or the drop in oil prices cutting revenue and investment in Canada and the U.S., the Federal Reserve is left with little room to effect more than a small rise in short-term rates through the remainder of the year, in my opinion. That specific concern, over a potential Federal Reserve rate hike, has overshadowed the other events this summer mentioned above. But now it appears the focus should be on fundamentals and opportunity. One month ago (see post from Thursday, 7/16/2015) I summarized the rise in rates to date for investment grade municipals. I feel it is not a stretch to view that move as complementary to any rate move by the Federal Reserve.
Barclays notes that currently its Municipal Bond Index is positive for the month of August, as well as positive (+1.00%) for the past three months. Its summary of July shows, again, that risk-adjusted returns for investment grade municipals continue to stand out versus other asset classes.