What’s With the Muni Rush and Today’s Other Top Stories

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Municipal bonds have started the year well, their performance has been especially impressive, considering the last two quarters of 2013 were nothing short of abysmal for the $4tn market. Detroit’s bankruptcy and the ongoing problems in Puerto Rico all took their toll.

But come 2014 investors are returning, last month, muni flows turned positive after 33 consecutive weeks of outflows, a sign that the market was stabilising after last year’s wreckage and creating hope among investors for a better year. But is the turnaround due to the current turmoil in emerging markets aligned with the threat of rising interest rates at home?

Both of these are strong possibilities, history has taught us that munis tend to outperform Treasuries in a rising rate environment. But Matt Fabian managing director at Municipal Market Advisors, says there is another reason for the sudden change of fortune.

“The biggest pull to the securities is coming from their tax advantages. Most investors in muni bonds are wealthy individuals seeking long-term streams of income and tax breaks.”

Every year during tax season in the U.S., munis benefit as hordes of investors look to reduce their tax exposure. The allure of generous tax breaks is clear. An investor in a 35% tax bracket would have to find a fully taxable security, such as a corporate bond, that yields more than 8 per cent to earn the same amount of income.

“For a large pool of investors, those incentives are hard to beat,” says Mr Fabian.

Fabian finishes by saying. “The muni market has its own challenges to overcome, but like any other fixed income asset class, they may be dragged also by the Treasury market, one way or the other,”.


Todays Other Top Stories

Municipal Bonds

Motherboard: – Can creationist junk bonds keep the Noah’s Ark theme park afloat? – Attendance at the Creation Museum has been steadily declining every year since its opening, and Ham’s latest boondoggle—a Biblical theme park featuring a life-size replica of Noah’s Ark called Ark Encounter—could face financial collapse if investors fail to purchase $29 million in unrated municipal bonds before construction is set to begin next month.

Income Investing: – Fitch cuts Puerto Rico sewer bonds to junk too. – After being the last of the big three rating agencies to cut Puerto Rico’s credit rating to junk this month, Fitch Ratings is wielding the downgrade stick anew today, cutting $3.4 billion of bonds issued by the Puerto Rico Aqueduct and Sewer Authority, or PRASA, to junk as well.

MarketsMedia: – Municipal bonds seen on upswing. – The municipal bond market is poised for a rebound, even as bad news continues to emanate from Puerto Rico.

MarketWatch: – Puerto Rico plans to tap muni bond market next month. – Puerto Rico is likely to issue bonds to finance its deficit and refinance debt next month, said Jose Pagán, interim president of Puerto Rico’s government development bank, on an investor webcast Tuesday.

Reuters: – Federal funding confusion leads Moody’s to cut highway bonds. – Uncertainty about the future of federal transportation funding has cast a shadow over many U.S. states’ highway and transit agencies, and Moody’s Investors Service on Tuesday downgraded the ratings of 16 municipal bond issues tied to U.S. road money.

Bloomberg: – California cities strained by retiree health: Muni credit. – The Los Angeles Unified School District, the nation’s largest outside New York City, owes so much for retiree health care that paying off its debt would cost $17,500 for each student — and there are 640,000 of them.

Donald van Deventer: – Puerto Rico bonds: The clock is ticking. –  The drama surrounding the Commonwealth of Puerto Rico and its ability to obtain financing has continued to rise. There is widespread unease about the holding of Puerto Rico bonds in municipal bond mutual funds. In this analysis, we update the current market view of two key Puerto Rico bond issuing entities and show how that view has evolved since June 1, 2013, with a particular focus on trades since January 28, 2014.

Wealth Daily: – Investing in the ’51st state’. – Could Puerto Rico’s recent credit downgrade be the final blow that pushes Puerto Rico into bankruptcy? Or can the island weather this perfect financial storm of hurricane proportions? You might be surprised at some rather upbeat forecasts.

Reuters: – Draft rule requires US muni dealers to seek best terms for clients. – Brokers and dealers would have to seek the most favorable terms for their customers in U.S. municipal bond trades under a proposal to create a “best execution” standard for the $3.7 trillion municipal market.



LearnBonds: – Are near-term bonds a viable cash alternative? – The options for cash are limited. Most “local yokel” banks pay around 25-50 basis points for savings accounts depending on balances, with perhaps a higher limited-term promotional rate available. One of the options that might be considered by yield starved cash investors is to shift one’s permanent cash allocation into corporate investment grade bonds with five years of maturity or less.

Market Realist: – What is the default rate and how it relates to bond and loan prices. – The default rate is a consideration for investors in municipal, investment-grade corporate, high-yield, and emerging market bonds, but it’s not relevant for U.S. Treasuries since it would be extremely rare that the federal government would default on its debt.


Treasury Bonds

WSJ: – Top foreign holders of U.S. Treasurys cut holdings in December. – Foreign investors in December cut their holdings of long-term U.S. securities as the Federal Reserve announced plans to begin exiting its easy-money policies in 2014, data published Tuesday by the Treasury Department showed.

Market Realist: – Must-know releases that will impact U.S. debt securities this week. – One of the most important highlights this week, February 17–21, for bond markets will be the Treasury International Capital data release that tracks the inflow and outflow of funds from the United States. This is relevant because the onset of the Fed’s tapering program, combined with weakness in domestic economies, has precipitated flight-to-safety flows to U.S. debt markets—particularly Treasuries.

ValueWalk: – Bond market consensus makes positioning more difficult. – U.S. Treasury net shorts haven’t been significantly reduced by the increased short-covering last month, and long positions in European and Japanese government bonds (EGB, JGB) have only gotten longer, but these crowded positions create vulnerabilities if the bond markets, which seems to be driven by global dynamics right now, become more sensitive to local pressures.


Corporate Bonds

Bloomberg: – China properties plumps for dollars as builders flock to bonds. – China Properties Group Ltd. (1838) has abandoned plans to sell yuan-denominated bonds in favor of dollar notes as the country’s developers return to U.S. currency debt markets.


High Yield

Market Realist: – Why did last week’s high yield bond issuance remain subdued? –  The credit spread between the high yield bond index and the U.S. ten-year Treasury declined 13 basis points last week. The compressed spreads reflect advanced expectations of economic improvement. While the overall bond market has dropped slightly due to expectations of increased interest rates, the high yield market drop has been offset by this spread compression. This may remain the case. However, spreads are already very tight compared to historical averages.


Emerging Markets

What Investment: – How to invest in emerging market growth, without the volatility. – Investors looking to access the ‘attractive’ growth prospects for emerging markets in a way which minimises the volatility associated with the asset class should combine emerging market debt and equity in their portfolio, according to Richard Titherington, chief investment officer for emerging markets at JP Morgan Asset Management.

Smarter Investing: – Emerging market bonds yielding over 5% beckon income investors. – Emerging market bonds are paying decent yields in a low-rate environment but many investors are wary of the sector due to recent gyrations in the currencies of developing economies.

WSJ: – Opportunities lurk in emerging markets. – Investors need to do their homework to find the right companies rather than make broad developing-country bets.


Investment Strategy

Stock Traders Daily: – Bonds diverging from stocks: What gives? – Sometimes the bond market provides a read on the economy that is opposite of what the stock market offers. Today’s environment is exactly like that, and even though the stock market has rallied hard off of its January lows the bond market has not retreated at all. In fact, as investors poured money into aggressive equities, the safe haven that is U.S. Treasury bonds was also bought aggressively.

CNBC: – With bond outlook dim, investors eye alternative investment strategies. – In the aftermath of the 2008 financial crisis, shell-shocked investors did a fair amount of soul-searching with regard to stocks. These days, they are working through their angst when it comes to the bond market, which has likely come to the end of a very long bull run.

Focus on Funds: – ETF Investors’ two biggest mistakes. – Here are what I’ll argue are ETF investors’ two biggest mistakes: (1) Trading too much, and (2) being too cute in what you buy.


Bond Trading

FT: – Goldman retreats from bond platform. – Goldman Sachs has quietly retreated from its electronic bond trading platform, in a move that highlights the challenges investment banks face in revamping their struggling fixed-income trading businesses.


Bond Funds

WSJ: – Pimco’s Bill Gross touts merits of new leadership model. – Bill Gross has a new mantra: Pimco is better than ever. In a transcript of a question-and-answer session posted Tuesday on the company’s website, the co-founder of Pacific Investment Management Co. said again that the recent change in the asset management firm’s leadership will deliver long-term value for its clients.

MarketWatch: – Volatile market spurs stock and bond investors to act. – This twist on the usual exhortation to take action urges caution instead. John Bogle has used it to warn investors against expensive and often useless fiddling with their portfolios rather than simply sticking to their strategies.

MarketWatch: – 3 things to know before you sell your bonds. – Bonds are a stable, income producing financial vehicle. So why are they getting such a bad rap? It’s just like the green vegetable analogy. There are economic circumstances where certain types of bond funds may lose value for some people. Instead of interpreting this as if all bonds are bad, what you need to do is take the time to understand those circumstances and determine if they apply to you.

FT Adviser: – Fixed Income: High yield star turn. – In the current low-growth, low-interest-rate environment, high yield, short-duration high yield, and bank loans were the best fixed income classes in 2013, and stand a good chance of a similar performance in 2014 if rates continue to rise as we expect.


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