Muni Market Needs More Oversight and Today’s Other Top Stories

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Oversight of the $4tn municipal bond market should be re-examined, according to a task force co-chaired by former Federal Reserve chairman Paul Volcker.

Municipal funding practices have been forced into the spotlight recently after Detroit filed the largest municipal bankruptcy in history last year. There are concerns that Detroit still managed to borrow even as their finances foundered.

Issuers in the century-old muni market have long guarded their ability to issue bonds against federal intervention using the Tower Amendment, a part of securities law that bans the Securities and Exchange Commission from requiring them to file bond documents ahead of sales.

But now, Volcker and former New York Lieutenant Governor Richard Ravitch – said the amendment should be “revisited so the SEC can require issuers to comply with sensible disclosure requirements as well as with robust accounting standards.”

The call comes as part of a larger package of recommendations, the aim of which is to make state finances more sustainable. State revenues have rebounded since the depths of the financial crisis, which exposed chronic underfunding of public pensions in state and local budgets.

But Volcker and Ravitch argue that many problems still remain, including rising retirement and healthcare costs, poor administrative practices and a lack of coordination between federal and state policy makers, continue to imperil the financial health of states.

Their report stressed the need for long-range budgeting and the importance of strong federal relations, but it went beyond to look at finance, debt and reporting. The task force recommended giving states strong oversight of local governments in advance of financial emergencies, and it called for helping states “develop rules for the creation of concise, timely and readable financial reports.”


Todays Other Top Stories

Municipal Bonds

Barron’s: – Municipal bonds poised for resurgence. – Income investing is making a comeback. From high dividend-paying stocks to utilities and REITs, the charts show a raft of positive developments. The difference today, however, is that the bond market and municipal bonds in particular are finally responding.

Bloomberg: – Biggest ETF’s premium grows as fund exodus abates: Muni credit. – The biggest exchange-traded fund tracking the $3.7 trillion municipal-bond market sold this week at the highest premium to the value of its assets since May, an early sign that local debt may avoid a second year of losses.

Public Sector Inc: – What’s the status of general obligation bonds in municipal bankruptcy? – Most recent coverage of the Detroit bankruptcy has focused on the issue of pension cuts, and rightly so. Should Emergency Manager Kevyn Orr succeed in his plan to reduce benefits in bankruptcy, other insolvent cities will be encouraged to follow suit. Across the nation, many cities have too much debt and Detroit won’t be the last go bankrupt.

IndexUniverse: – New muni bond ETF. – Market Vectors today is launching a short duration, high-yield municipal bond fund to take the risk of rising interest rates off the table for investors in a rising-rate environment at a time when the Federal Reserve has begun “tapering” its quantitative easing monetary stimulus program.

Bloomberg: – California credit outlook raised to positive from stable by S&P. – California had the outlook on its general-obligation debt raised to positive from stable by Standard & Poor’s, said Gabriel Petek, an analyst at the company.

Bloomberg: – Puerto Rico bonds outpace muni rally after revenue beats budget. – Puerto Rico debt is rallying the most in a month, outpacing the $3.7 trillion municipal market, as the U.S. commonwealth’s revenue beats forecasts.



IndexUniverse: – How a negative-duration bond ETF works. – The idea of shorting Treasurys as a way of minimizing exposure to interest-rate risk has long been used in the institutional space, but AGND is the first example of an ETF issuer bringing a popular institutional-caliber solution to the ETF market. But how do negative-duration bond portfolios work?


Treasury Bonds

Inquirer.net: – Treasury defends $500M bond sale at 4.2% rate. – The national treasurer on Monday maintained that the government got a good deal out of its latest international bond sale, shrugging off criticism that the fund-raising activity was expensive.


Corporate Bonds

Income Investing: – U.S. corporate default rate ends 2013 at 2.2%. – If you’re looking out for risk in bond markets this year, it probably won’t come in the form of defaults. Moody’s late last week said the default rate among junk-rated U.S. companies dropped to a mere 2.2% in the fourth quarter of 2013, down from 2.7% in the prior quarter and 3.4% at year-end 2012. Globally, the default rate finished 2013 at 2.6%, down from 3.0% from the prior quarter, and in Europe it fell to 3.4% from 3.6%.

What Investment: – Stick with corporate bonds despite tapering fears: JP Morgan. – The consensus view that the tapering of the US government’s monetary easing programme will be bad for investors in corporate bonds is wrong, according to Andreas Michalitsianos, manager of the JP Morgan Sterling Corporate Bond Fund.


High Yield

Income Investing: – Indomitable junk bonds already up 0.8% in 2014. – Even with stocks slumping, the junk bond market has marched boldly ahead through the first two weeks of 2014, already posting a return of 0.78%, per a benchmark Bank of America Merrill Lynch index. This after junk bonds gained 7.4% in 2013. Junk bonds similarly barreled into 2013, after gaining 15.6% in 2012, by posting big gains last January, lending credence to the so-called January effect as it applies to bonds.


Emerging Markets

ETF Daily News: Emerging Global Advisors and The TCW Group Partner to launch emerging market investment-grade bond ETFs. – Emerging Global Advisors (EGA), the asset manager to the EGShares exchange-traded fund (ETF) offering, and The TCW Group (TCW), a global asset management firm, today announced their partnership to launch a suite of Emerging Market (EM) fixed income ETFs.


Catastrophe Bonds

Business Insurance: – $1.9 billion in catastrophe bonds closed in 2013 fourth quarter. – Eight catastrophe bonds closed during the fourth quarter of 2013 with a total value of $1.9 billion, according to a new report issued Monday by Aon Benfield Securities, the investment banking division of Aon Benfield Group Ltd.


Investment Strategy

Investorplace: – Income investing strategies for 2014: Bond ETFs. – Income investors face a brave new world in 2014 that is punctuated by real interest rates trending higher and the Federal Reserve slowly reducing the pace of their quantitative easing measures. This has led to fears of a massive shift in asset allocation from traditional fixed income to equities and alternative investments. In fact, many have abandoned bonds and bond ETFs altogether and have sworn off owning them for the foreseeable future.

Brian Romanchuk: – Do bonds make sense for long-term investors (Part II). – In part one, I argued that the problem with bonds is that long-term bond yields are quite a bit lower than expected long-term equity returns. I argued the main reason to hold long-term bonds is the uncertainty about those equity market returns. In part two I will list a few other reasons to hold bonds in your portfolio.


Bond Funds

ETF Trends: – ETF virtual summit highlights interest rate risk in bonds. – After touching a three decade low, benchmark rates are already starting to creep higher, weighing on bond exchange traded fund returns. Consequently, fixed-income investors need to adapt to the turning tides.

Interactive Investor: – Active income portfolio could find high returns hard work in 2014. – Active income seeking isn’t going to get any easier in 2014. For many years, the knee-jerk reaction of many cautious investors has been to lock-in steady income with government bonds.

FE Trustnet: – How to get a yield over 4 per cent for a 0.3 per cent charge. – A relatively new range of ETFs offer a yield high enough to compete with active income-focused funds but for the cost of a passive vehicle.

Interactive Investor: – Outlook for fixed income in 2014. – We are fairly sanguine about bond markets in 2014. Returns in 2014 are likely to be similar to those in 2013, although it may be more difficult for corporate bonds to post large gains relative to core government bonds.

Zacks: – Top 5 top rated balanced mutual funds. – A list of the top 5 balanced mutual funds from Zacks. Each has earned a Zacks #1 Rank (Strong Buy) as we expect the fund to outperform its peers in the future.


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Simon G

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