Income Investor Perspectives

THIS WEEK IN THE MUNI CATCHUP:

• Overview
• $30 Billion
• College Football Playoffs!
• The Bottom Line
• The Wisdom of Buffett

Overview

Wow, did I make myself look smart! Out of the 206 municipal market indices published by S&P, 9 of the top 10 total returns for July were reported for taxable indices. Astute readers will recall that I have been reminding muni investors of the benefits of taxable munis, see the Catchups from 7/25 or 7/18 to confirm that. Although, to be honest, I’ll admit that my suggestions were not meant as a market call but as reminders that munis aren’t just for taxable accounts!

The top ranked S&P muni index for the month was the S&P Municipal Bond Defaulted Multifamily Index, but that is so far out of the usual area of interest for most muni investors that I won’t dwell on it here other than to remind readers that accessing that part of the muni market is best left to full-time professional management, so if you are inclined to defaulted or speculative grade munis, do it through a mutual fund or an ETF.

Sorry…I didn’t mean to make the table into an eye test! Click here to open ito open it as a PDF.

Even with the soft total return performance for the muni market for July, the Year to Date and Trailing 12-Month total returns for most muni indices have numbers more like equity returns. See the Context page for more total return index data. Another example of my view that “Low Yields ≠ Low Return.”

As you’ll notice from the Yield Trend Table on the Context page, muni yields finished the month slightly higher, while Treasury yields ended noticeably lower. The news flow for the month pushed Treasuries around a lot…the political conventions, the FOMC meeting and the GDP report to name just a few influences.

The last table on the Context page is the recent recap of flows into muni bond mutual funds and ETFs, which have benefitted no doubt from the heavy flow of matured and called bonds in June and July (and probably will in August too), yet it is remarkable that the YTD inflows are well ahead of the last two calendar year totals. In my view, this is a result (at least in part) of investors needing to replace their earned income with portfolio income. Don’t be surprised if a jump up in yields–if it ever happens–also results in an additional bump-up in inflows to the muni market from yield-hungry investors.

$30 Billion

Yup…there will be an estimated $30 billion in munis redeemed in August. But you knew that already, didn’t you? All of that money will have to go somewhere. Some of it may not get re-invested until clients and advisors are back from the beach or the lake, but chances are a good chuck of it will stay in munis–either in bonds, funds or ETFs, likely providing some good buy-side interest.

College Football Playoffs!

There are only 106 business days left until the College Football Playoffs begin on New year’s Eve in the Peach Bowl. That’s not a lot of time…my recommendation is to procrastinate later, and get to work right now planning out the rest of the year to be sure you squeeze as much out of it as you can. There are only a few weeks left for you to print out your version of The Summer Thinking List–there’s one for advisors, and a short version for clients and prospects. This year’s lists are my all-time most viewed post. Do your self (and your clients) a favor and put them to use!

The Bottom Line

Check Your Calls: Premium are at an increased risk of being called away–this doesn’t mean that you should sell callable bond holdings, but it does mean that you should only add additional callable premium bonds after evaluating the concentration of call risk in your portfolio. It would also be sensible to evaluate what you would do if your callable bonds were called at their next call date.

Beware the Coupon: Favoring par bonds now may not be a prudent move for investors because of the potential exposure to the unfavorable tax treatment on market discount should rates move higher. If you are a buyer, continue to favor premium bonds–to reduce the risk of bonds moving to a discount if rates move higher.

Pay Attention to Duration, but Don’t Be Afraid of It: It may be tempting to put new money to work where performance has been the strongest (in long-duration bonds, funds or ETFs), but we all know that past performance is not an indicator of future returns. When the market turns, duration will be the total return investor’s foe. Unless you are an active total-return investor prepared to react quickly to market changes, new money should be put to work in line with the long-term goals as defined by your investment policy statement. But don’t be afraid of duration…it is possible to be too short on the yield curve. As can be seen in the yield curve on the Context page, there is a bump in the muni yield around the 15-year spot on the curve–going beyond that spot produces less incremental return for taking on the additional duration.

And still, Don’t Forget Taxable Munis! Investors with money in tax-deferred or other non-taxable accounts should compare the yields on taxable muni bond offerings versus comparably rated corporate bonds.

The Wisdom of Buffett

The dog days of summer are here…what are you going to do with them? Let’s see what we have this week from The Poet:

You need a holiday
take a holiday
find a far off wonderland
where you might regain command
of your life today

Take a holiday
you need a holiday
grab a pack and hit the trail
take a sail
and wind up in some moonlight bay

You’re caught up in the Internet
you think it’s such a great asset
but you’re wrong, wrong, wrong
All that fiber optic gear
still cannot take away the fear
like an island song

From Holiday, by Jimmy Buffett

It’s time for me to take a little holiday…no Catchup next week. See you on August 15!

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. 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
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