“Lake Wobegon, where all the women are strong, all the men are good looking, and all the children are above average.” – Garrison Keillor
Shall we compare the municipal market to the fictional Lake Wobegon? This asset class continues, in my view, to exhibit solid, stable characteristics that I believe make it nearly impervious to the exogenous volatilities of the world around it.
The Barclays Municipal Bond Index is still AA3 1 average quality, tax collections for states are predicted by many analysts to exceed pre-recession levels and, according to Bloomberg, the economic health of 44 states improved in the fourth quarter of 2012. As the recovery continues to gain ground, I believe strong, good looking and above average could apply to the municipal bond market.
All things considered, if one were to judge the municipal bond market by performance alone (-0.43% in March and 1.10% in April 2 ), the past two months have been rather indifferent. Behind the numbers, however, the market has been churned by a handful of significantly large (+$1 billion) new deals, a steady outflow of cash from bond funds and the well documented political assault underlying the Obama administration’s proposed budget, which, if passed, would cap the tax-exempt benefit at 28%.
And despite the obvious flaws reflected in names such as Harrisburg, Vallejo, Stockton and Detroit, in my opinion, this asset class, if nothing else, demonstrated its resiliency. (See timeline graphic.)
I believe the near-term outlook for municipals continues to build a positive narrative, as investible cash from maturities, bond calls and coupon payments should, in my opinion, prime demand.
Now that we have personal income tax payments in our rear-view mirror, investors can again focus on the fundamentals which I believe continue to argue for municipals as a positive income generator with generally high credit quality and potentially less volatility than some other fixed-income options. Lake Wobegon doesn’t sound so bad after all.
Market Vectors Intermediate Municipal ETF (ITM)
James Colby is a portfolio manager and senior municipal strategist at Market Vectors ETFs.
1 Source: Moody’s. The Moody’s rating scale is as follows, from excellent (high grade) to poor (including default): Aaa to C, with intermediate ratings offered at each level between Aa and Ca. Anything lower than a Baa rating is considered a non-investment-grade or high-yield bond.
2 Source: Barclays. Based on the Barclays Municipal Bond Index which is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year.