Income Investor Perspectives

Independent municipal bond market insights for advisors

Category: Uncategorized

April 7, 2015

Will Money Market Fund reform create bond market orphans?

The deadline to implement the new reforms to money market funds (requiring floating NAV for institutional funds) looks like it will result in tighter focus on which securities portfolio managers will be considering for their funds. A recent Bloomberg article drew attention to a letter to clients from BlackRock in which “[T]he company said it would have funds that limit holdings to securities with maturities of seven days or less.”  The company cites the reduced supply of short maturity U.S. Treasury securities and the reduced liquidity in the repo market as important factors in how they are adjusting their product line-up. (For an update on the repo market, WSJ subscribers should read Pressure in Repo Market Spreads, April 2, 2015.)

Increased demand and reduced supply = lower yields.

Well before the required change, the markets can be expected to differentiate between the securities eligible for the MMFs to invest in and those that are excluded (the “orphans”), with yields on the excluded securities likely to be higher. With lower yields for investors in the money market funds, the yield-hungry may be tempted to look at the higher-yielding “orphans” for their “liquid” holdings. But holding securities that will not have bid-side support from institutional portfolio managers means that even short-duration securities could be at a disadvantage in choppy market conditions. There is still much to be revealed about how the changes will filter down to the specifics of security selection, but everyone should be paying attention to the news flow.  (Bloomberg Business has a Money Market Fund news page available.)

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April 1, 2015

Muni Update: Low Rates Don’t Have to Mean Low return

Low interest rates do not necessarily mean low returns.

For example, through the 12-months ended March 31, Barclays calculated a 6.62% total return for their municipal bond index—that’s more than 2 1/2% higher than the 4.00% average yield on the Bond Buyer 20-year index as reported for a similar period by the Federal Reserve. **

Year to date, some highlights:

  • Barclays Agg    1.61%
  • Barclays Muni    1.01%
  • Barclays US Treasury 20+ year    4.19%

While buy and hold bond investors have a good indication of what they will earn over the lifetime of their investment (based on their purchase yield and the coupon rate on their bonds), there can be opportunities to capture gains. Taking advantage of those opportunities when they present themselves means that some bond market investors may be able to earn a total rate of return that is higher than prevailing interest rates.  (Don’t forget–past performance is interesting, but not necessarily an indicator of future results.)

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March 30, 2015

Muni Bond News: Political Risk

The Wall Street Journal (March 30) has a column from Richard Ravitz (former NY Lt. Governor who was influential in dealing with New York City’s financial crisis) regarding the fiscal problems in Chicago and the upcoming election. The situation in Chicago is a good reminder that investors who hold (or are considering) municipal bonds need to evaluate and monitor the political risk associated with the bond issuer. Political risk does not just mean what the current politicians are saying, but includes the “mood” of the taxpayers / ratepayers and “baked in” structural taxing, borrowing or spending plans. Evaluating and pricing political risk should be a part of the credit evaluation process.  See my comments on Credit Risk / Political Risk here.  Subscribers can read the WSJ article here.

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March 18, 2015

BONDS ARE NOT STOCKS

What equity investors should know about bond investing

  • Bonds are Not Stocks;
  • Ratings, Credit Risk and Political Risk
  • Dividends and Interest;
  • Low Rates Don’t Have to Mean Low Return;
  • Liquidity Risk
  • Bonds or Bond Funds
  • How About Bond ETFs?
  • Interest Rate Risk
  • How Will ____ Affect My Bonds?

An old bond trader’s maxim says that you make you money when you buy—not when you sell. Selecting bonds or a bond manager uses many of the same business decision making processes as are used in the equity portfolio, but because of the different characteristics of the two classes of assets, investors need to bring a different perspective to how they recognize and manage risks.

To read the article, please click here.

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December 18, 2014

The Benefits of Professional Management

  • When should an investor use a professional manager?
  • If an investor needs more performance (yield or return), should they use a professional manager?
  • Should a manager be selected based on performance?
  • If a manager’s performance is lagging, should they be fired (or sold) by the investor?
  • Will using a professional manager protect from market declines?

SUMMARY: Because so many investors seem to select managers by chasing recent performance, one might imagine that professional managers market themselves only by touting their performance. However, the fundamental reasons to use a professional investment manager are when the investor does not have the time or the necessary expertise to properly make those decisions themselves. Professional managers can be employed for all or a portion of a portfolio and should be selected first based on how well the manager’s strategy fits in with the investor’s goals. Neither performance nor fees should be the primary criteria for manager selection—downplaying the importance of how the strategy fits into the long-term goals could easily lead to improperly balanced risk exposure. While performance is very important, investors should favor those managers who emphasize their process, and be wary of those touting only their recent performance. 

This article discusses the benefits of using a professional manager to manage some or even all of the investment decisions—for example by using mutual funds or a separately managed account (SMA). Beyond the scope of this article is a discussion of using a professional wealth manager—such as a registered investment advisor—to conduct financial planning and to make all of the allocation and investment decisions.

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