Municipal Bond Market Update

Market Overview - What began as a correction of historically low interest rates in May escalated in June as the Federal Reserve hinted at the eventual end to quantitative easing. Fed talk of "tapering" its bond purchase program sent all markets into a "taper tantrum" whereby stock prices dropped and bond yields rose. In the municipal market, yields spiked (and prices fell) to levels not seen since 2011.

Fund flows, the best measure of demand, were a negative $16.5 billion for the month (down 129% year over year). This was significant, but not entirely unexpected. The voracious demand of the prior two years could not continue unabated, much like the stellar performance run. Some would argue a correction was overdue. While it would have been easy to blame fundamental factors, the market has continued to weather these events very well. Ultimately, the correction restored value in the market.

Making Headlines - States' improving revenue picture has made 2014 budget season a virtual nonevent. Forty-five states passed balanced budgets for fiscal year 2014, which started on July 1 for most. The five remaining states have no notable budget issues. From a fundamental perspective, most municipal credits are improving, at least in terms of their ability to pay.

Outlook - Municipal bond yields ended June at levels not seen since 2011, offering compelling value. After underperforming Treasuries in recent weeks, muni-to-Treasury ratios are above 100% across all maturities. The case for munis is bolstered by a strong reinvestment period, with July and August bringing $75 billion in coupons, calls and maturities—monies that investors will be looking to redeploy into the market. Overall, tax-exempt munis remain an attractive option for income-oriented investors seeking to keep more of what they earn.

Source:  BlackRock

D2 Capital Management's Tax Free Income Portfolio consists of a diversified mix of highly rated municipal bond mutual funds.  The Portfolio currently has a 2.60% SEC 30 day yield and a 3.28% trailing 12 month yield which results in a 4.55% tax equivalent yield for an investor in the 28% Federal Income Tax bracket (as of 11 July 2013).

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.