Strong Technicals Vs. Weak Headlines
- Friday, 03/30/2012
- Muni demand-supply technicals are favorable
- The market shrugs off downbeat headlines
- High-yield munis continue to offer potential value
On both Wednesday (3/28) and Thursday (3/29), municipal prices regained lost ground, especially in the intermediate part of the curve. Why? 1) New issue supply fell by nearly 50% week over week; 2) Bernanke's testimony implied more Fed stimulus to support employment; and 3) Data showed no meaningful improvement in the housing sector.
Price activity suggests that today's muni yields and relative valuations appear attractive, although we suspect that professional traders drove the trend. Muni technicals are favorable, given that demand is catching up with supply, and the 10-20 year yield on municipal bonds* now stands at 107% of Treasuries.
Despite a few downbeat headlines — e.g., the state of Michigan threatening to takeover cash-strapped Detroit and Chapter 9 saber-rattling in Providence, RI — munis continue to trade smoothly overall. It appears that the market is viewing the headlines calmly, as isolated events that are not likely to spread contagion to other sectors or regions.
As measured by Barcap Indices1, investment-grade munis remain in positive territory year-to-date, with high-yield munis performing even better. (See performance breakout below.) High-yield munis currently are trading about 100 basis points above their long-term average spread to investment-grade indices, and, in our opinion, they continue to represent value.
Month-to-Date through 3/26/2012
Year-to-Date through 3/26/2012
Barcap HY Muni1
*As measured by the Barclays Capital Municipal Bond index.
1The Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Capital High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year.