Munis stand out in bond universe despite dawn of annual autumn slump

It’s that time of year again for the municipal bond market.

The fall months are typically weak for muni bonds and although this year has generally bucked seasonal trends, it looks that way again this year.

“There’s been a lot of unevenness in a usually more predictable market,” said Peter Hayes, head of the Municipal Bonds Group at BlackRock. “However, October tends to be weak so we were cautious coming into September.”

True to form, muni bonds have been sliding. The Bloomberg Barclays Municipal Bond Index is down 1.43 percent since the end of August and now has a return of -1.11 percent for the year. That won’t help send your kids to college, but relatively speaking, it’s a pleasant surprise in an otherwise rough year for bond investors.

“Muni performance has been nothing to write home about, but it’s been better than just about every other fixed income segment,” said Tom Hession, managing partner at Riverbend Capital Advisors. Hession’s firm sub-advises separately managed accounts of muni bonds for wealthy clients.

More from FA Playbook:
How you can retire in your 30s or 40s
Maximizing the tax benefits of medical expenses
Put your credit card points to work for you

In the rising interest rate environment, the muni index decline compares very well with U.S. Treasury bonds -2.12 percent and U.S. investment grade corporate bonds -3.1 percent, through Oct. 16. “Munis tend to do relatively well in a rising rate environment,” said Hayes, who credits their higher coupons and callability for insulating against rate increases. “They outperform when rates are rising and underperform when rates are falling.”

The current weakness, however, could extend for a while if interest rates resume their rise and market supply and demand factors become more negative.

So far this year, the market has benefited from a reduced supply of bonds, in large part, as a result of tax reform passed last year. Because of uncertainty over the tax-exempt status of muni bond income, as well as other potential rule changes in the market, issuers flooded the markets with bonds at the end of last year, pulling roughly $30 billion of issuance forward, according to analysts.

That led to one of the worst Januaries for the muni market on record (-1.18 percent). But it also cleared a lot of bonds from the pipeline that would have otherwise hit the market through this year.

The tax bill also disallowed the common practice of advance refunding, which enabled municipalities to refinance debt at lower rates. It accounted for about 15 percent of muni bond issuance in the market.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *