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Municipal Bonds Performance

April 6, 2018

 

The first quarter of 2018 has been disappointing for investors due to concerns about rising interest rates, inflation, and newly established tax rules. In February and March, municipal bond mutual funds only saw an investment of $268 million – a 92% drop from the five-year average. In the past three months, a majority of municipal bonds ETFs have returned between a negative 1%-2%. A bad quarter for municipal bonds has not occurred in the markets since Q1 2008. Yet, despite concerns about such congruence, much of the effect is caused by lower taxes leading to lower demand for tax-exempt bonds.

 

Due to worrying purchasing powers, investors are looking towards newly issued bonds rather than outstanding bonds (only until the price of such securities falls). From a perspective of the government, low bond prices have resulted in rising borrowing costs on the state and local level. 

 

Yet, there also remains optimism in the market; a bipartisan bill, aimed at reducing the reach fo Dodd-Frank would classify municipal debt as high-quality liquid assets, is expected to pass. The National Association of State Treasurers has attributed higher borrowing costs for the government to the lack of exclusion from the high-quality liquid assets designation. Currently, the municipal bond spread results in a ~85% yield of comparable Treasury bonds, a value higher than the historical average.

 

Keith Knutsson of Integrale Advisors commented, “Given that lots of uncertainty remain regarding the deregulation of Dodd-Frank, it makes municipal bonds too speculative for the average investor currently.”

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