Municipal Market Presents Attractive Entry Point
Following the typically strong period of technical demand that is associated with the early part of the New Year, we chose to maintain a more defensive posture on behalf of our clients by favoring modestly shorter portfolio durations as we believed that the seasonal factors, historically associated with the latter part of the first quarter, that is March and early April, would once again push municipal yields higher as the market endeavored to digest heavier issuance. This period is historically one of the heaviest supply and weakest demand periods of the municipal calendar year which causes it to be one of the worst periods from a performance perspective for the broader municipal bond market. Consistent with our expectations, the thirty day municipal bond primary calendar has indeed grown meaningfully, swelling from $5.7 billion in early February to its current size of over $12 billion, according to Bloomberg. This supply is weighing on the municipal bond market. As Treasury yields have fallen, municipal bond yields have fallen significantly less. Tax free, AAA rated, municipal bond yields are now just under 2.00% which means one can achieve returns on municipal bonds in ten years which are now higher, on a nominal tax-free basis, then corresponding taxable Treasury yields. Municipal bonds are, therefore, quite cheap from a historical and relative value perspective in our view. These yield ratios are unlikely to persist however. As the broader market becomes aware of this condition and perceives what we see as an attractive entry point for investors, we believe the relationship will normalize over time causing the municipal bond market to outperform. Having said that we also believe that select AA, A, and BBB rated bonds offer better value still. In light of the now much higher effective Federal, state and local tax rates for individuals and wealthy investors in particular, we believe a unique buying opportunity exists in the municipal bond market today.
© Clinton Investment Management
