1) Our Perspective
END OF THE BULL RUN FOR MUNIS? - OCTOBER 2016
Ronald Schwartz, CFA
Managing Director,
Senior Portfolio Manager,
Tax-Exempt
Ron is a Senior Portfolio
Manager focused on the
Tax-Exempt Strategies. He has
worked in the investment
management industry since
1982. Ron received a B.A. in
Business Administration from
Adelphi University and is a CFA
Charterholder and a member of
the CFA Society of Orlando.
Scott Andreson
Director, Municipal Research
Scott is the Director of Municipal
Research for Seix Investment
Advisors. He has more than 17
years of investment experience.
He earned his MPA from USC
and is a current officer of the
National Federation of Municipal
Analysts.
CONTRIBUTORS
Dusty Self
Managing Director,
Senior Portfolio Manager,
Tax-Exempt
Phillip Hooks, CFA
Vice President,
Municipal Credit Research
After a strong run of 14 straight consecutive months of positive returns, tax exempt bonds
generated their first negative returns (-0.50%) in September. The central bank also recently
indicated that the case for tightening monetary policy has strengthened. As a result, many of our
clients have been asking us if we think the bull market for municipal bonds has ended. We
believe that this is a temporary seasonal weakness dip caused primarily by a significant increase
in issuance and not the start of a sustained bear muni market. Historically, the tax exempt
market’s technical conditions weaken in the fall months as supply increases, fund flows decline,
and fewer coupon and principal reinvestments. The upcoming election, combined with recent
statements of a possible rate increase by the Fed, is most likely enhancing the seasonally weak
technical conditions.
Record Issuance in 2016?
Muni volume set an all-time
monthly record in September and
supply will likely remain robust
through November as issuers rush
to take advantage of record low
rates. This year’s increase in new
money issuance now brings the
current size of the muni market to
an all-time high, eclipsing the peak
set in the fourth quarter of 2010,
and is currently running $100
million higher than the five year
average. Gross municipal bond
supply is now conservatively
projected at $440 billion for 2016,
which will exceed the $433bn
record set in 2010 (see Exhibit 1).
However, by December, the
technical conditions are projected
to improve as net supply becomes
negative (see Exhibit 2).
Exhibit 1: Gross supply is forecast to be $440bn in 2016, $100bn
higher than the five year average
$60B
$50B
2016: $440bn
2015: $405bn
2014: $334bn
$40B
$30B
$20B
$10B
$0B
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Source: S&P, J.P. Morgan, Thomson, Bloomberg
Exhibit 2: Net supply is expected to turn supportive of municipal
outperformance in December following positive net supply of +$16bn
in October and November
$15B
11.5
10.0
$10B
7.4
4.5
$5B
9.2
7.1
3.0
$0B
-$5B
-$10B
-$15B
-$20B
-4.2 -4.1
-2.9
2016 Net Supply
-14.8
-17.6
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Source: S&P, J.P. Morgan, Thomson, Bloomberg
2) Our Perspective
END OF THE BULL RUN FOR MUNIS? - OCTOBER 2016
Strong Tax Exempt Fund Flows in 2016
Demand has been solid this year with a run of 54
weeks of positive mutual fund flows for a
cumulative $60.2 billion that just recently ended.
While muni fund flows have recently slowed to
their lowest weekly total since last November,
and have actually turned negative for tax exempt
high yield funds, this is not uncommon for this
time of year (see Exhibit 3). Stock market
volatility, negative interest rates overseas, and
the recent cheapening of muni/Treasury ratios
are likely to continue to bring in crossover and
foreign buyers into our asset class, which will
help to somewhat mitigate the seasonal slowing
of fund flows.
Exhibit 3: Municipal fund flows: 4 week moving averages
Source: Citi Research, Lipper
The recent correction has presented a better buying opportunity after the summer’s strong market technical factors led to
rich valuations that did not reflect the softening of domestic fundamental conditions. We have been upgrading our portfolios
and raising cash over the past few months in anticipation of a fall seasonal correction and now plan to take advantage of the
current cheap market conditions. Our call continues to be that long term rates will remain lower for longer, regardless of any
possible Fed actions later this year. As a result, we remain constructive on the municipal sector because of its tax exempt
income, attractive Treasury ratios, and very compelling yields compared to other global fixed income rates.
The assertions in this perspective are Seix Investment Advisors’ opinion.
Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the
potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally,
a portfolio’s fixed income securities will decrease in value if interest rates rise and vice versa. A portfolio’s income may be subject to certain state and local
taxes and, depending on your tax status, the federal alternative minimum tax. There is no guarantee a specific investment strategy will be successful.
This information and general market-related projections are based on information available at the time, are subject to change without notice, are for
informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for
individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not
intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or
conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix
Investment Advisors does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment processional about their
specific financial needs and goals before making any investment decisions.
Past performance is not indicative of future results.
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