To get the Best of the Bond Market delivered to your email daily click here.
The recent selloff in muni bonds caused by Detroit’s bankruptcy and the Feds tapering fears has, according to David Kotok chief investment officer at Cumberland Advisors Inc., presents an entry opportunity in the tax-free municipal bond market that is unparalleled except for one other time.
That time was when Meredith Whitney dropped the muni bomb on “60 Minutes”. Whitneys December 2010 statement that the muni bond market was about to experience hundreds of billions in defaults, triggered a wave of selling in the $2.9 trillion muni market. A statement which proved to be unfounded.
Fast forward to today and we see that July marked the third straight month of declines for munis, the longest slide since the month after Whitney made her forecast on “60 Minutes”.
The selloff means munis now offer considerable value. Benchmark tax-exempt munis with a 10 year maturity have a taxable-equivalent yield of 4.82%. Compare that with an interest rate of about 2.6% on 10 year Treasuries.
However, before you jump on the muni train – it pays to be cautious when purchasing muni-bond funds.
Many of these funds hold a number of bonds which are not only prone to potential defaults, but highly interest-rate sensitive. Interest rates are bound to climb as the economy heats up or the Fed changes its policy.
The best way to stem interest-rate risk, is to buy funds with shorter maturities, which are less sensitive to rate increases than longer-maturity notes.
For those investing in individual bonds, try to choose non-callable bonds with the highest credit-ratings – “A” or better.
Finally, when buying any bond fund or individual bond, always remember that higher yields come with higher risk. Not all muni bonds are created equal, so it’s critical to check the quality of credits, before you invest.
Todays Other Top Stories
MoneyBeat: – Pimco’s Bill Gross boosts U.S. government-related holdings in July. – The Pimco Total Return fund run by high-profile manager Bill Gross boosted U.S. government-related holdings in July to 39% from 38% a month earlier, according to data released on Pimco’s website Friday afternoon.
PIMCO: – Bill Gross – Bonds can still deliver in a rising rate environment. – Podcast from Bill Gross who explains how bonds can still deliver when rates rise.
Learn Bonds: – Bond Wars – Defend yourself with these 5 weapons. – In his August 2013 Investment Outlook, “Bond Wars,” Bill Gross shares with investors five “weapons” he collectively categorizes as “carry.” Carry, as Gross explained, is “another word for yield.” But, as he continued, it “often comes in forms less obvious than a fixed semi-annual interest payment.” In what other forms does carry come?
Bond Vigilantes: – Great rotation, no signs yet. – Great rotation? No signs yet. Mutual fund flows into equities and bonds remain highly correlated.
Reuters: – Bond funds have lost $6.2 bln so far this month. – Bond mutual funds and bond exchange-traded funds have lost $6.2 billion so far in August, continuing a trend this summer where investors favor stocks over bonds, research provider TrimTabs Investment Research said on Sunday.
ETF Trends: – International high-yield bond ETFs for income. – International high-yield bond exchange traded funds are outpacing U.S. junk bonds as European speculative-grade debt rose for the sixth consecutive week.
Bloomberg: – The $1M check that sat in a drawer: How Detroit went bust. – In late February, cash-strapped Detroit received a $1 million check from the local school system that wasn’t deposited. The routine payment wound up in a city hall desk drawer, where it was found a month later.
Zero Hedge: – The ultimate guide to Detroit’s chapter 9 bankruptcy. – The Chapter 9 process is underway and Barclays provides a deep-dive look at the various liabilities involved in the bankruptcy. From the pension obligation certificates, which they believe could be subject to the most volatility over the course of the bankruptcy process and will likely recover no more than 30 cents on the dollar, Barclays’ muni team expands on the various aspects of the eligibility process.
WSJ: – Muni bonds after Detroit. – In the wake of Detroit’s bankruptcy filing, some financial advisers are selling their Michigan municipal bonds and reinvesting elsewhere while others are hunting for bargains across the state.
MoneyNews: – Detroit bankruptcy has chilling effect on Muni bonds. – Detroit’s bankruptcy is sending chilling effects through the municipal bond market, and some worry that the situation could get worse, perhaps spreading beyond Michigan.
WSJ: – Muni-bond buyers seeking safety. – Detroit bankruptcy prompts some investors to shift into higher-rated segments of the market.
FT Adviser: – Picking the right bonds. – Investors should carefully choose a fund or manager with the appropriate experience.
FT Alphaville: – Greater and lesser rotations. – Here’s an interesting reality-check from JPMorgan’s excellent Flows & Liquidity note late last week, about the long-term role of the retail investor in this stuff. It’s built on a view that retail money first flowed into bonds in recent years after leaving money markets funds beached by ZIRP (the “savings motive”) — and where they might return.
Huffpost: – Municipal bonds and how Detroit bankruptcy impacts bondholders. – When Detroit became the biggest city in U.S. history to file for bankruptcy last month, it turned public attention to the municipal-bond market, where cities and states go to borrow money. Was this sleepy, often-overlooked area of the financial world actually dangerous?
Courier Journal: – 6 questions and answers about muni bonds. – Following Detroit’s bankruptcy many investors have abandoned the muni market. But are muni bonds really all that bad?
Journal Gazette: – Municipal bonds defy gloom. – Detroit’s record bankruptcy filing isn’t derailing the $3.7 trillion U.S. municipal-bond market.
FT: – Municipal bond insurers look to benefit from Detroit bankruptcy. – Bond insurers exposed to billions of dollars of Detroit debt expect to emerge as long-term winners from the largest municipal bankruptcy in US history.