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Municipal bonds had rough ride in 2013, with many investors choosing to exit the once stable, tax exempt muni market. But many advisers are warning that now isn’t the right time to start unloading municipal debt.
“Although some municipalities remain fiscally challenged, this is the wrong time to panic,” says Jeffery Timlin, municipal portfolio manager at Sage Advisory in Austin, Texas.
Why should you stick it out?
Recent fiscal reforms designed to ease pressures in some of the most troubled cities and states. In Detroit’s case, U.S. Bankruptcy Judge Steven Rhodes judgement earlier this month could pave the way for the city to cut pension payouts as part of its restructuring.
These moves should reassure muni investors, says Amy Laskey, a muni-bond analyst at Fitch Ratings. If the Detroit ruling stands, “it should have some significance in other bankruptcy courts,” she says.
The market’s slump is likely to extend into next year, analysts at Morgan Stanley predict. They expect that an average muni bond will lose 1.3% in 2014. But Michael Zezas, who heads the firm’s municipal-bond strategy team, believes most of that downturn will come in the first part of the year as yields peak. “The muni hangover isn’t going to be permanent,” he says.
How to structure your portfolio
So how should you structure your muni portfolio to withstand fluctuations in the market? Learn Bonds contributor Anthony Valeri, head of fixed-income research at LPL Financial, told the WSJ. “Now might be a good time for muni investors to tilt portfolios more to intermediate-term issues, specifically bonds maturing in seven to 12 years, says which has $415 billion in assets.”
One fund that portfolio managers at LPL Financial say they are favoring now is the iShares National AMT-Free Muni Bond MUB -0.02% ETF, which charges annual fees of 0.25%, or $25 per $10,000 invested.
If rates surge, munis with relatively shorter terms may hold up better. “But if stocks plummet, then you’ll be forced to sacrifice the additional downside protection that intermediate-term bonds provide,” Valeri said.
Todays Other Top Stories
Municipal Bonds
The Street: – Muni investors rush for exits. – Municipal bond funds saw $1.9 billion in outflows this week as investors continue to back away from the market.
Yahoo Finance: – Little respite seen for U.S. municipal bonds in 2014. – The withering U.S. municipal bond market will shrink even more well into 2014, with interest rate and credit risks keeping both investors and borrowers away.
Bloomberg: – Massachusetts sells $525 million in GO bonds. – Massachusetts plans to sell $525 million of general-obligation bonds for a capital plan that includes an extension of Boston’s Green Line train and an overhaul of the city’s South Station rail hub.
Bloomberg: – Accelerating fund withdrawals extend biggest losses: Muni credit. – The largest wave of withdrawals from municipal-bond mutual funds since August is extending the $3.7 trillion market’s worst losses in five years.
Business Insider: – Why investors are fleeing muni bonds at record rates. – Muni investors have a lot to be frazzled about. Municipal bonds used to be considered a safe investment – though that may have been propaganda more than anything else. Munis are exempt from federal income taxes, hence their attractiveness to conservative investors in high tax brackets. Munis packaged into bond funds appealed to those looking for a convenient way to spread the risk over numerous municipalities and states. While the Fed was repressing rates, muni bond funds were great deals.
Treasury Bonds
Bloomberg: – TIPS wipeout signals Fed losing fight against disinflation. – Bond investors are signaling they expect the Federal Reserve to lose its battle against disinflation, even after inundating the U.S. economy with more than $3 trillion in the past five years.
BRecorder: – Nasdaq plans ‘dark pool’ for U.S. Treasuries by John McCrank. – Nasdaq OMX Group plans to create a so-called dark pool for electronic US Treasuries trading where buying and selling interest is not revealed, even on a post-trade basis, the company’s chief executive officer said recently. Nasdaq, which runs the No 2 US equities exchange, closed its $750 million acquisition of eSpeed, an electronic Treasuries-trading platform formerly run by BGC Partners Inc, in July.
ForexLive: – U.S. Treasury bonds not consigned to the bin just yet. – The US saw a turnaround in capital outflows in October from $97.6bn to inflows of $194.9bn. Foreign buyers picked up $39.7bn in Treasuries from $28.5bn in Sep while Japan’s holdings fell marginally to $1.174tn from $1.178tn prior. China increased theirs to $1.305tn from $1.294tn. Foreign buyers of equities took a fall to $7.8bn from $14.7bn.
Investment Grade
WSJ: – Investors are hungry for U.S. corporate bonds. – Bond investors are showing the most confidence in corporate America since the financial crisis, underscoring expectations that the U.S. economy will keep rolling as the Federal Reserve prepares to trim monetary stimulus. Purchasers of corporate debt are demanding the smallest interest-rate premium to comparable government bonds since 2007.
High Yield
Learn Bonds: – Toll Brothers’ newly issued bonds are worth a look. – In November, Toll Brothers, through Toll Brothers Finance Corp. issued $250 million of 5.625% coupon senior unsecured notes. Despite trading a bit over par, the notes still offer an attractive yield for the given level of credit risk.
Forbes: – U.S. High yield bond issuance posts another strong week, at $10.4b. – High yield bond issuance in the U.S. saw a second consecutive solid week, with $10.4 billion in volume, following up on the $9 billion issued the previous week. The $10.4 billion is the busiest high yield week since the whopping $16.5 billion recorded in late September.
Barron’s: – Junk bonds hope for a repeat. – People often look at the past year’s returns to gauge next year’s prospects, but rarely do the two match up. Yet bond markets are in an unusual position: Two top-performing sectors—junk bonds and leveraged loans—actually could pull off a repeat.
Emerging Markets
Morningstar: – For emerging-markets bond exposure, these funds are tops. – Don’t look abroad for fixed-income exposure without first considering these analyst-recommended offerings.
ETF Trends: – Emerging markets bond ETFs look to a better 2014. – Among emerging markets bond exchange traded funds, a once hot corner of the ETF universe, 2013 will go down as a year to forget. That sentiment applies to both dollar-denominated and local currency funds.
Bond Funds
The BIG Picture: – Crowding in – Bond interest rates. – We are watching bond market volatility as Treasury bonds struggle with questions about what the Fed (Federal Reserve) is going to do. Only the passage of time and improvement of communication from the new Fed leadership will resolve this issue of inadequate clarity and resulting volatility.
Philly.com: – Great expectations for an investment rotation. – ETF Trends: – Some new ETFs are off to fast starts. – Roughly 140 exchange traded funds and exchange traded notes (ETNs) have come to market this year. As is the case with any year’s crop of new ETFs, some are off to faster starts than others.
The Seattle Times: – Bond funds may set a record for redemptions. – Investors have removed $70.7 billion so far this year from bond funds, compared with the previous record of $62.5 billion in redemptions in 1994.
RGJ.com: – Americans rotate to stocks from bonds. – After years of sticking with plain-vanilla bond funds, investors are starting to turn their backs on them and opt for stocks instead.
FT: – U.S. investors flock to ‘alternative’ bond funds. – The flow of money into a new class of bond fund that gives managers unprecedented discretion over its trading strategy has surged this year, amid retail investors’ concern over the prospect of rising interest rates.
WSJ: – Morningstar reports U.S. mutual fund asset flows for November 2013. – Morningstar, today reported estimated U.S. mutual fund asset flows for November 2013. Long-term mutual funds attracted inflows of $14.5 billion during the month to bring year-to-date inflows to $258.8 billion, a pace that should make 2013 the strongest for yearly inflows since 2009. Robust inflows combined with equity-market appreciation have pushed mutual fund assets to a record $10.8 trillion, up 30 percent since the peak seen in October 2008 prior to the financial crisis.
MarketWatch: – Rebalance with cash — not bonds — before year end. – Rebalancing between bonds and cash at year end is quite common. Traditionally some practitioners have suggested a higher proportion of bonds as an investor ages. A split of 60% for stocks and 40% for bonds is quite popular.
ETF Database: – Best & Worst Bond ETFs of 2013. – 2013 has been a somewhat volatile year for the fixed income market, as investors continue to weigh the current low interest environment with the possibility of the Federal Reserve tapering its bond buying purchases. As a result, most bond ETFs struggled to keep up with the equity market’s quick pace, with many funds ending in the red in 2013.
Kiesel: Investors looking to capitalize on the improving outlook for US housing have several options. Learn more: http://t.co/TaDoUM0ydg
— PIMCO (@PIMCO) December 16, 2013
https://twitter.com/PIMCO/status/412622103532548096
https://twitter.com/Muni_Mkt_Advis/status/412640091564044288
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