Income Investor Perspectives

Muni Holders: Timing is Everything

The latest data about muni bond ownership came out today, and in an example of unfortunate timing, in the third quarter (right before the recent increase in rates), individual investors reduced their direct ownership of munis by $6.5 billion, but increased indirect ownership though mutual funds by $13.5 billion. While individual bonds do go down in value when interest rates go up, because mutual funds are managed to maintain duration, it can take much longer for their NAVs to recover from a decline.

Other notable Q3 changes in municipal ownership:

• Non-U.S. investors increased their holdings by $3.6 billion. (Not surprising given the negative interest rate world outside of the U.S.)
• Insurance companies increased their holdings. Property and Casualty companies by $3.4 billion and Life companies by $1.8 billion.
• ETFs increased by $1.4 billion. (But regular Catchup readers know that already.)
• Non-muni bond mutual funds hold $17.0 in munis, a decline of $1.6 billion in the quarter, but still a significant increase from the $10.3 billion held at year-end 2015.
• Bank ownership increased by $11.5 billion.
• Money Market Mutual Fund holdings dropped by $57.4 billion. (This is not surprising, given the recent reform in Money Market Mutual Fund regulations.)

See next week’s Muni Catchup for more data and analysis on today’s numbers.

If you do not already subscribe to receive The Muni Catchup via e-mail, you should do so right now. The subscription form is below. As a reminder, there is no charge for The Muni Catchup, but if you find it helpful, you can help by sharing it.

The Muni Catchup is not investment advice. The opinions expressed and the information contained herein are based on sources believed to be reliable, but accuracy or appropriateness is not guaranteed and are subject to change without notice. Past performance is interesting but is not a guarantee of future results. Investments in bonds are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. Indices are not available for direct investment, although in some cases, there may be ETFs available designed to track some of the indices shown. 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. Additional information available upon request.
©2016 Patrick F. Luby
All Rights Reserved

THIS WEEK IN THE MUNI CATCHUP:

• Yields and Buying are Up
• Fund Flows: Mutual Funds Negative but ETFs Positive (slightly)
• New Issue Supply Remains Heavy, but…
• The Bottom Line
• Muni Data Tables and Charts

Muni yields have moved higher very quickly. Is this a buying opportunity? Or should investors be selling?

While we generally remain cautious, current levels do appear to present a buying opportunity. However, investors are cautioned…

Click here to keep reading.

By the way, did you know that T.S. Eliot was wrong? If not, that means that you missed the November market recap. Here’s the link to it so you can go read it now.

If you do not already subscribe to receive The Muni Catchup via e-mail, you should do so right now. There are several special articles planned for the weeks ahead that you will not want to miss. The subscription form is below. As a reminder, there is no charge for The Muni Catchup, but if you find it helpful, you can help by sharing it.

The Muni Catchup is not investment advice. The opinions expressed and the information contained herein are based on sources believed to be reliable, but accuracy or appropriateness is not guaranteed and are subject to change without notice. Past performance is interesting but is not a guarantee of future results. Investments in bonds are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. Indices are not available for direct investment, although in some cases, there may be ETFs available designed to track some of the indices shown. 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. Additional information available upon request.
©2016 Patrick F. Luby
All Rights Reserved

T.S. Eliot was wrong…November is the cruelest month. (At least it was this year.) Fixed income total return indices turned in the worst performance in a long time. Duration is no longer the investor’s friend.

• But has the bond market sold off too much?
• Are rates going to continue to go higher?
• Or, could they go lower from here?
• What happens if the various votes in Europe put pressure on the Euro? Will assets flow into U.S. Treasuries? What if the votes strengthen the position of the Euro?
• How about munis? Mutual funds are losing assets while issuance remains heavy. Are munis going to cheapen further? How might tax reform affect yield ratios?

Clearly, much uncertainty continues to swirl around the markets.

The emotional reaction to the market turmoil might be to exit fixed income. But what would Ben Graham would do? I would expect that he would remind investors that the chances for long-term success are improved when emotion is eliminated from the investment decision-making process–decisions should be based on arithmetic not optimism (or fear). We encourage investors to take that advice to heart and to maintain their appropriate asset class exposure as determined by their plan, because no matter what you think is going to happen, it is possible that the opposite will happen. However, for those portfolios that are overweight duration, it is prudent to consider scaling it back. Using low duration fixed income ETFs can be one way to quickly do that.

Finally, in order to help reduce the risk of April being the cruelest month, use the remaining weeks of the year to harvest losses–especially from long-duration fixed income positions. Tax-loss swaps can be a helpful tool when seeking to adjust the portfolio duration.

We are now using the AP Municipal Benchmark Curve, Powered by MBIS as our indicator of municipal market yields. The Associated Press (AP) – Municipal Bond Information Service (MBIS) U.S. Tax-Exempt Municipal Index covers the long-term tax-exempt municipal bond market and is based on actual trades and market quotes in the municipal bond market. The curve tracks the offered side of the market and includes smaller transaction sizes to reflect what individual investors may see in the market. The curve assumes 5% coupons with 10 year call protection. The curve is available to subscribers at http://www.mbis.com/apindex/ and is also distributed by The Associated Press to newspapers around the country.

Thanks For Reading

Pat

This is not investment advice. The opinions expressed and the information contained herein are based on sources believed to be reliable, but accuracy or appropriateness is not guaranteed and are subject to change without notice. Past performance is interesting but is not a guarantee of future results. Investments in bonds are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. Indices are not available for direct investment, although in some cases, there may be ETFs available designed to track some of the indices shown. 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. Additional information available upon request.
©2016 Patrick F. Luby
All Rights Reserved

Most bond market yields are now higher on the year–a good thing for investors who have been waiting on higher rates and more income, but a painful turn of events for investors in mutual funds who will be seeing declines in their NAVs. Is it time to capitulate and sell? Or, is it time to buy? One answer does not fit all, but the answer does depend on your time horizon–for investors, the answer is different from traders.

This week and the following two weeks will be good indicators of what the new trading ranges will be–there are no holidays or elections to distract market participants, so with more normalized volume, it will be interesting to see where the market finds equilibrium. The week after the election, trading volume was unusually heavy–average daily par amount traded was 27% above the current seasonal* (post-Labor Day) average while last week, volume was unusually light–26% below the seasonal average.

Click here to the this week’s Muni Catchup:

• Rates Continue to Backup–will they attract buyers?
• The Tide Has Turned–will the heavy outflows from bond funds continue?
• Did You Read About Dallas? Has a new fault line emerged in the muni market?
• Supply–will new issue muni supply increase under President Trump?
• The Bottom Line

Self-directed investors are putting themselves at risk if they are not doing their homework and surveilling the credits in their portfolio.

From “A New Fault Line in the Muni Market?”

This is not investment advice. The opinions expressed and the information contained herein are based on sources believed to be reliable, but accuracy or appropriateness is not guaranteed and are subject to change without notice. Past performance is interesting but is not a guarantee of future results. Investments in bonds are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. Indices are not available for direct investment, although in some cases, there may be ETFs available designed to track some of the indices shown. 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. Additional information available upon request.
©2016 Patrick F. Luby
All Rights Reserved

Why are some people happy, even amidst difficult circumstances? And why are some people so unhappy, even when they have great abundance?

Gratitude. Gratitude is the secret of happiness.

The opposite of gratitude is the sense of entitlement–that somehow we deserve that which we have not earned.

Each of us enjoys countless blessings, more than we can count or even identify.

But we do not earn blessings–they are given to us, and there is no quid pro quo with blessings. Even the fruits of our labors–what we have built or earned–often depend on what we have received from others.

The Thanksgiving Holiday provides a good opportunity to identify some of the blessings that we may have overlooked and to renew our sense of gratitude.

So thank you to all of my family, friends, colleagues and readers. Best wishes for a wonderful Thanksgiving Holiday.

Pat Luby

PS–Thanks also for my doctor and his staff, as I have been out of commission with a virus for several days. Hopefully, the Catchup will be back on schedule next week.

November 2016