Fed Up With the Fed?

In the wake of newly released economic indicators, namely large employment gains versus expectations, and the strong suggestion in the Federal Reserve’s (the “Fed’s”) commentary that a rate increase is likely in December, the push and pull of investor sentiment have created further uncertainty for tax-free investors in terms of deploying cash in the last few weeks of the calendar year. It is generally understood that fixed income investors are not fond of uncertainty.

For the past two years, the specter of uncertainty has, in my view, inhibited allocations to the municipal space when conjecture – not fact – has ruled the financial headlines. Factually and fundamentally, a rate rise has already been priced into the muni yield curve. History tells us that the markets overreact to such change. As a recent article on ETF.com reminds us, what remains tactically important about munis are the following:

1. Yields are currently attractive
2. My performance outlook for the asset class is positive
3. Munis have been a good diversifier to portfolios
4. Infrastructure needs should keep up muni issuance
5. Default risk has been historically very low
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Much of what has been said in this space over the past 12-24 months about the relative value and attractiveness of both intermediate and high-yield municipals remains true. With year-to-date returns being mostly positive, the aforementioned attributes may spark consideration for those undecided about what to do as we approach year-end.

Year-to-Date Muni Total Returns

Source: Barclays as of 11/16/15.

I believe that most investors are fed up with the lingering indecision of the Fed. The opportunity cost of taking no action over past weeks may no longer be worthwhile. In a challenging year for investors, this back-to-basics strategy may be the better course of action.