There is almost nothing more familiar to many generations, young and old, than the symbolic, if not physical, act that comes with the crossover into a new year. We are now into 2014 and (as has been noted by many in the municipal bond investment community) during the first half of January we saw a significant turnaround in the performance of municipal bond funds from what took place in November and December — indeed during the entire calendar year 2013. It leads one to wonder whether the market too is “turning the page.”
We are fortunate that the negative trends of the past eight months appear to have been broken, or at least interrupted, allowing us to reflect on real and inherent values in the muni market. To begin with, it would appear that credit quality is making a comeback as downgrades and credit analyses generally indicate that upgrades are anticipated to balance the scales in the coming year. Also, the Rockefeller Institute of Government reports that quarterly tax revenues at the state level have exceeded analysts’ projections, suggesting, among other things, lessening pressure on leaders to raise taxes, and potentially opening the door to an uptick in hiring at the local level.
Municipal bond index yields, for investors in the highest tax bracket on a taxable equivalent basis, were higher than most other fixed income benchmarks at the end of December 2013. I believe this could be a signal that the seeker of tax-free1 income may find quite attractive income as well as relative value in the municipal market place.
Source: Bloomberg. As of December 31, 2013.
Also not to be overlooked is the variety of options open for short- and intermediate-term investors to reposition their municipal investments and potentially manage both interest rate sensitivity and credit exposure.