Muni Catchup 1/23

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This Week’s Ingredients:

  • Comments
  • Chart of the Week
  • Performance Snapshot
  • Fund Flows: still positive
  • New Issue Supply: steady
  • The Calendar
  • Market Data
  • Housekeeping: new stuff at IIP!
  • The Bottom Line: barbell / underweight duration / conservative structure

Comments

Infrastructure. In the muni market and beyond, there are lots of questions being asked about how the new administration will deliver on candidate Trump’s trillion-dollar infrastructure promise.

The topic came up Friday in President Trump’s Inaugural Speech:

[We’ve] spent trillions of dollars overseas while America’s infrastructure has fallen into disrepair and decay.

We will build new roads, and highways, and bridges, and airports, and tunnels, and railways all across our wonderful nation.

But there is still little clarity. As much as investors and government officials (and citizens) might like to see an immediate increase in new financings for roads, highways, bridges, tunnels, railways, water and sewer systems, renewable energy projects and more, most cities and states are constrained in their borrowing capacity. And, the growing uncertainty surrounding pension and retiree benefits means that future borrowing capacity may be even less. As a result, the question of how the promised infrastructure might affect the muni market is now one of the items on our Muni Risk Radar.

While the need for infrastructure repair and improvement is significant, charting the course of action–and deciding how to pay for those improvements–will take some time.

Stay tuned.

Chart of the Week

The short end of the muni market has had very strong trading volume.

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Performance Snapshot

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New Issue Supply

  • Last week:      $9.5 billion
  • This week:      $6.8 billion

Click to see the complete New Issue Calendar on the MSRB’s EMMA site, which also allows you to see details on the new issues that have recently come to market.

Calendar

1/22 – 1/25 Inside ETFs  Will you be there?
1/31 – 2/1 FOMC Meeting
2/5 Sunday Super Bowl 51
2/20 Presidents Day Holiday  All U.S. markets closed
3/14 – 3/15 FOMC Meeting With Press Conf.
4/10 DOL Fiduciary Rule Scheduled to take effect
4/14 Good Friday All U.S. markets closed
4/18 Tuesday Federal Tax Returns Due Not on the 15th as usual
5/2 – 5/3 FOMC Meeting
5/29 Memorial Day  All U.S. markets closed
7/4 Tuesday Independence Day  All U.S. markets closed
9/4 Labor Day  All U.S. markets closed
10/9 Monday Columbus Day  Stocks open / bonds closed
11/11 Saturday Veterans Day  Does not fall on a weekday
11/23 Thanksgiving  All U.S. markets closed
12/25 Monday Christmas  All U.S. markets closed
May, 14 2018 Deadline for bond dealers to begin disclosing mark-ups on some bond trades Effective date for new MSRB and FINRA rules.

Market Data

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Housekeeping

screen-shot-2017-01-21-at-12-08-31-pmNew this week is an updated version of the Muni Risk Radar, which originally appeared in The Catchup earlier this month.Also new this week is The Catchup Archive, to make it easier to go back and see earlier issues of The Muni Catchup.

Both can be found by going to the About Investing page from the top menu.

The Bottom Line

Buy? Sell? Hold? Ladder? Barbell? Bullet?

Structure: Barbell For those who need a refresher about the differences between a ladder, barbell and bullet portfolio structures, see our Glossary. For investors building a portfolio from scratch, we favor a barbell now, with the expectation that it would be slowly converted to a ladder over the next 1 to 3 years.

Curve: Cautious (underweight your duration target). Going too short on the curve and there is not enough yield to offset inflation, going too long on the curve and there is the potential double whammy of high duration (interest rate risk) combined with low liquidity. As can be seen in the graph above, there is still a shift in the curve beyond ten years, where incremental duration risk receives much less incremental reward. We have never been in favor of arbitrarily drawing a line at ten years as some investors do, so if there are opportunities to pick up attractive amounts of incremental yield by extending a few years beyond 2028, that may be worth considering.

Structure: Cautious We continue to favor premium bonds for protection from rising rates pushing holdings into a market discount, which can accelerate the decline in market value, due to the onerous tax treatment of market discount that exceeds the “de minimis” exclusion.

Credit: Cautious Perceptions of the economy and credit risk are going to be volatile in the months ahead as the new administration’s proposal are filled in. Municipal investors need to be very selective in taking on credit risk, especially from issuers with minimal margin of protection. The lower the credit quality, the greater the importance of liquidity, so when taking on more credit risk, be willing to take less than the maximum yield in order to be in a part of the market with more liquidity. As always, our preference for non-investment grade exposure is to use a professional manager via a SMA (Separately Managed Account) or mutual fund, or through an ETF which will offer very low costs and broad diversification.

And Now, a Word From Our Sponsor

If you or your firm are wondering about how to apply any of this to your conversations, please contact me. My specialty is helping advisors through the decision-making process of which muni bonds, funds, ETFs, CEFs or SMAs to consider for their clients. Click here for additional ideas about how you can take advantage of my expertise.

If you are at Inside ETFs this week, be sure to let me know so that we can say hello.

Thank you for reading, and best wishes for a great week,

Pat

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We use 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.
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.
©2017 Patrick F. Luby
All Rights Reserved