To get the Best of the Bond Market delivered to your email daily click here.
The $3.7 trillion municipal bond market used to be perceived as a relatively low-risk, buy-and-hold investment for individual investors drawn to the tax-free income stream they provided.
How times have changed, the stability of the muni market has been shaken by a number of high profile defaults along with the recent bankruptcy of Detroit. And the ongoing problems in Puerto Rico show these problems are far from behind us.
So where does that leave investors, looking for stable tax free returns? Peter Coffin, president of Breckinridge Capital Advisors, recently sat down with Charlie Henneman, CFA to give his view on the way investors can navigate the complicated bayou that the U.S. municipal bond market has become.
Coffin noted that most of the muni bond market is “stable to positive,” despite scary headlines about Puerto Rico. The combination of rising home prices, improving economic indicators, and the positive investment performance of equity-heavy municipal pension plans — a gift of the buoyant equity markets — has contributed to a better credit profile for many municipalities.
While Puerto Rico’s roughly $70 billion in outstanding issuance remains a serious concern, “I would never describe Puerto Rico as a potential systemic risk,” Coffin said.
Coffin went on to say. “There have been improvements in the near-term picture, but pension obligations are still a huge problem for many issuers, and therefore to bond investors. “A lot of these liabilities are, in the long run, simply unfundable”.
He suggested that it isn’t particularly difficult to estimate a timeline to insolvency for the most at-risk issuers by comparing their disclosed pension liabilities with their likely sources of funding over a period of time.
Coffin’s analysis of the muni market is interesting and insightful. If you’re invested in munis and what to learn more about the dynamics currently affecting the municipal bond market, along with the best way to navigate these choppy waters. I urge you to read the full article here.
Todays Other Top Stories
Reuters: – U.S. muni bond sales to slump next week. – U.S. municipal bond sales are expected to revert to recent form next week, with a slender $3.29 billion in new issuance on tap, according to Thomson Reuters estimates on Friday.
Market Realist: – How will a Puerto Rican default affect the municipal bond market? – Puerto Rico’s $70 billion in public debt, which was recently downgraded to junk level by S&P, is soon going to come down heavily on the $3.7 trillion U.S. municipal bond market.
Bloomberg: – Holland, Michigan, sells $160 million power plant bonds. – A $160 million bond sale beginning tomorrow will finance a natural gas-fired power plant for Holland, Michigan.
FT.com: – Blind focus on yield endangers muni market. – Few issuers or investors are thinking ahead to when the Fed moves.
Bloomberg: – University of Chicago is outlier with growing debt load. – The University of Chicago has been trying to stand out from its elite rivals and is doing so in one category: amassing debt. That’s put its credit rating at risk.
Muniland: – Puerto Rico’s local Chapter 9, a good start. – John Mudd writes about the new legislation filed in the Puerto Rico Legislative Assembly to allow the restructuring of public corporations.
Insurance News: – SEC encourages municipal issuers to come clean now. – The Securities and Exchange Commission (SEC), strapped for financial examiners and enforcement personnel, wants municipal bond issuers and underwriters to report violations before its examiners find out about them.
NY Times: – Determining the markup on municipal bonds. – Most of the market news you hear tends to be about stocks, but bonds are just as useful a tool for most investment portfolios. One type in particular, the municipal, or “muni” bond, remains very popular. These bonds are issued by local governments, they’re often tax-exempt and they can be relatively low risk. But muni bonds come with a catch: You may be entering a dark and dangerous world when you go through the process of buying one.
WSJ: – Treasury bonds rise for fifth session. – Treasury bonds gained for a fifth straight session on Friday on worries about geopolitical tensions arising from the crisis in Ukraine.
LearnBonds: – With Safeway going private, should you own the bonds? – The recent news of Cerberus’ offer to purchase Safeway for roughly $9 billion brought with it varying reactions among Safeway’s bond investors. One question bond investors may be asking themselves is: should I buy those high-yielding Safeway bonds? Here’s some food for thought.
WSJ: – Fresh corporate debt sparks a feeding frenzy. – Mutual funds and other investors burned by the bond-market selloff last spring are scrambling for freshly issued corporate debt like never before, lured by how much easier it is to sell than older debt even when the markets are panicky.
CNBC: – Are junk bonds losing their ‘high-yield’ status? – Yield chasers have made high-yield debt one of the most popular asset classes this year, pushing returns to near record lows, and some analysts are concerned the segment is becoming too risky.
FT: – European corporate default rates fall. – The rate at which European companies default on their debt is forecast by Standard & Poor’s to fall further, because of improving economic growth.
ValueWalk: – Junk bond funds: Dumb investment of the week. – I disagree with allocations to broad junk bond funds in portfolios and especially now given the current dynamics in the junk bond market. Thus I’ve decided to name junk bond funds Strubel Investment Management’s Dumb Investment of the Week.
Euroclear: – Emerging market bond issuers should thank the Fed, says ECB research. – Bond issuance in emerging markets over the last five years would have been half its actual size were it not for the US Fed’s quantitative easing programme, according to a study carried out by the European Central Bank.
John Dowdee: – Selecting the best emerging market bond funds. – If you decide to invest in emerging market bonds, the question is: what are the “best” funds to purchase?
FT Adviser: – Managers eye up emerging markets. – Strategic bond managers are starting to dip their toes back into emerging market debt, claiming investment in the asset class now could be a key driver of returns this year and beyond.
FT: – Artemis ultra bear reverses view of emerging markets. – Artemis’s William Littlewood has reversed his ultra-bearish view of emerging markets for the first time since he launched his flagship £998m Strategic Assets fund in 2009.
Ashmore: – Growing opportunities in emerging markets corporate bonds. – The emerging markets corporate bond debt universe is much larger and much more diverse than investors commonly assume.
Investment Europe: – Emerging market debt offers attractive entry levels – BNY Mellon. – Investor timing, US growth and monetary policy to be key market drivers for Emerging Market Debt in 2014, according to BNY Mellon investment boutiques.
CNBC: – Are bonds still a safe bet? It depends. – The recent financial crisis that brought capitalism to its knees has ushered in an extended period of historically low interest rates as the U.S. Federal Reserve Bank (the Fed) implemented policies that saved the economy but may have created an unsafe environment for bonds. The question is, are bonds still a safe bet?
Market Pulse: – Morgan Stanley: Stay the course on stocks, worry about bonds. – Despite the stop-and-start beginning of the year for stocks, Morgan Stanley strategists recommend “staying the course” with a bullish tilt toward equities.
MarketWatch: – Taking another look at stocks, bonds, gold and grains. – There’s a lot going on these days. Crimea, a region of Ukraine, will hold a referendum this weekend on whether or not to join Russia. A secondary concern is bad data from China. Gold is rocketing, stocks are swooning and bonds are rising on jitters. But let’s take a deep and breath and take another look at all that’s going on.
Zacks: – Zacks #1 Ranked government bond mutual funds. – We share with you 5 top rated government bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all government bond funds.
FT Adviser: – Bonds start year on a sure footing. – We have seen considerable equity market volatility this year, with the US Federal Reserve Bank’s decision to taper its quantitative easing programme seemingly having consequences far and wide.
FA Peter Rohr has a 35% allocation to municipal bonds, via 3-17-14 issue of Barron’s.
— Tom Kozlik (@tomkozlik) March 17, 2014
Janney: California reported tax revenues which were $1 billion higher than expectations in February alone #muniland
— Cate Long (@cate_long) March 17, 2014
The Fed is expected to taper their asset purchases by another $10B on Wed. What are the chances of a larger than expected taper?
— Ed Bradford (@Fullcarry) March 17, 2014