Income Investor Perspectives

Independent municipal bond market insights for advisors

Month: March, 2016

The $100 Billion Muni Summer!

June has historically marked not only the end of school and the beginning of summer, but also the annual peak in municipal bond redemptions.

This year is expected to follow the same pattern, with over $100 billion in munis expected to roll-off in June, July and August.

Screen Shot 2016-03-29 at 1.15.01 PMThe opportunity to reinvest principal is one of the benefits of holding individual bonds, but with current rates and economic uncertainty, many advisors and their clients may be uncertain about how to reinvest–or even if they will want to reinvest in municipal bonds.

In addition to all of the factors that should normally be considered….

Click HERE to keep reading!

March 29, 2016

The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy or appropriateness is not guaranteed. This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. Past performance is interesting but is not a guarantee of future results. Investments in bonds, and fixed income funds or ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request. 

©2016 Patrick F. Luby

Muni Bond DIFM is Growing

Screen Shot 2016-03-17 at 2.26.54 PMMuni Bond DIFM Ownership is Growing

Rates are low and the Fed is on hold; municipal finances are stressed and bond market liquidity is down. While there would seem to be lots of reasons for investors to be avoiding municipal bonds, individual investors were actually net buyers of municipal bonds last year—but not through the traditional means of adding individual bonds to their portfolios.

Last year, according to data from the Federal Reserve, fewer individual investors were opting for the DIY (“Do It Yourself”) model of managing individual bonds on their own, and there was growth in the use of professionally managed (“Do It For Me,” or DIFM) mutual funds and ETFs.

Data from the Federal Reserve show that direct individual investor ownership of municipal bonds declined by over $25 billion last year, however, indirect ownership through muni bond mutual funds and ETFs grew significantly.

 

2014

2015

Change

Total Outstanding

$3,652.4B $3,714.8B +$62.4B +2%
Households (direct)

$1,540.4B

$1,514.8B

-$25.6B

-2%

Mutual Funds

$657.7B

$705.4B

+$47.7B

+7%

ETFs

$14.6B

$18.5B

+$3.9B

+27%

The positive flows into mutual funds and ETFs are continuing this year. Through March 9, muni bond mutual funds have attracted $10.7 billion in new assets (according to the Investment Company Institute) and muni ETFs have added almost $1.5 billion (according to FactSet data).

Part of what may be driving the shift away from DIY into DIFM…..

Click HERE to continue reading the complete article on ETF.com

This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. At the time the article was written, the author did not have any positions in the securities or strategies mentioned. The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy or appropriateness is not guaranteed. Past performance is interesting but is not a guarantee of future results. Investments in bonds, and fixed income funds or ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request.

Muni Liquidity Down

Most municipal market investors and their advisors would agree that liquidity in the municipal bond market has declined in the last several years.

Using the amount of financial assets reported by broker/dealers as a proxy for their market-making activities and therefore the depth of markets, reveals the decline.

Screen Shot 2016-03-17 at 9.22.58 AM

Since the end of 2006, the estimated amount of broker/dealer assets devoted to supporting the municipal bond market has declined by over 70%.

The reduction of broker/dealer support of the municipal bond market is not surprising, as the trend reinforces the anecdotal observations about the changing nature of secondary market liquidity. (This chart is not intended to imply complete precision in the amount of capital deployed by the broker/dealer community to the markets, but rather to be indicative of the trend of their level of activity in the markets.)

The recent reduction of support of the market by broker/dealers has created a tangible reduction in the ability of investors to easily sell or buy on a consistent basis. While this does not mean that investors should reduce or avoid municipal bond investments solely for this reason, it does raise the importance of considering potential secondary market liquidity prior to making any investment decisions.

While liquidity may be down, investors continue to be active net buyers of municipal bonds–especially through mutual funds and ETFs. (Market flows will be examined in another post. Interested readers may wish to also look at this recent article on ETF.com.)

Self-directed investors must be comfortable with the implications for their own portfolios, or consider if they would prefer delegating portfolio decisions to a professional manager.

 

This is not a recommendation to buy, sell or hold any securities or strategies. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy or appropriateness is not guaranteed. Past performance is interesting but is not a guarantee of future results. Investments in bonds, and fixed income funds or ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request.

 

Consider Swapping HY Bonds for HY Muni

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The investor’s shelf needs to include tools and techniques, as well as texts and journals. Tax-loss swaps are a tool frequently used by bond investors to turn lemons into lemonade by simultaneously harvesting losses and adjusting the positions in the portfolio. 

While many investors most often think of tax-loss swaps as a year-end strategy, now may be a good time to review your portfolio for opportunities to harvest tax losses.

This can be particularly timely for investors with allocations to high-yield corporate bonds who may be disappointed by recent negative returns and who were also surprised by the higher-than-expected correlations with their equity positions.

Of course, some investors without exposure to high-yield corporate bonds are currently thinking about getting in, suggesting that now could indeed be a good time to think about harvesting losses and establishing a new cost basis.

Investors who want to reduce the equity correlation of their fixed-income allocation and are comfortable maintaining their exposure to noninvestment-grade credit risk may want to consider swapping from high-yield corporate bonds into high-yield municipal bond ETFs.

While the credit risks in high-yield municipal bonds can be much different from traditional investment-grade public-purpose municipal financings, the recent performance of the high-yield muni sector has been much different from high-yield corporates… CLICK HERE to read my complete article on ETF.com

 

This is not a recommendation to buy, sell or hold any of the securities mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments.

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