April Municipal Bond Review

Time to Dip Your Toe in the Ocean as Muni Yields Back Up

with Tom Dalpiaz, Managing Director (May 5, 2015)

[PDF Version]

After trading in a fairly tight range from late-March to mid-April, municipal bond yields rose sharply by the end of the month.  The upward movement in Treasury bond yields was a prime force in dragging municipal yields higher in the last two weeks of April.  The somewhat reduced demand for municipal bonds, typical of April, also contributed to higher municipal yields.  Muni bond investors have to go back to mid-March of this year and November of last year to find municipal yields that match current levels.  Investment grade, intermediate municipal bonds currently found at yields of 2.50% to 3.0% equate to taxable bond yields of 4.42% and 5.30% for top tax bracket investors (comparing nicely to current Treasury bond yields of 1.55% to 2.18% in the 5 to 10 year range).  

The recent tick up in municipal yields comes at an interesting time for investors.  Typically, as May flows into June and July, municipal bond investors have a harder time locating bonds given the strong demand caused by large reinvestment of bond interest and maturities in those months.  I believe that the seasonal effect down the road makes this present time of somewhat higher rates an opportune time to commit funds to the municipal market.  In addition to these municipal-specific factors, the macro interest rate picture over the next few months should be fairly benign.  I have discussed in previous commentaries the broad forces currently working that are likely to cause the Fed to raise its Fed Funds rate target later this year.  The bond markets may spasm a bit when that happens (or they may not) but I believe the Fed is likely to take its time with additional rate hikes after that.  Given the Fed's own language and comments, it seems intent on watching the impact its first rate hike will have on the markets and the economy before it insitutes additional moves.  It is my judgment that bond investors waiting for a big rate rise to commit funds to the municipal bond market (particularly in the intermediate range) are likely to be disappointed.

Even with the challenging bond markets of February and April so far this year, intermediate municipal bonds find themselves in positive territory from a total return perspective year to date.  The Barclays 7-Year Muni Bond Index, through the end of April, has garnered a total return of 0.86% in 2015.  Curiously, this return has beaten both the 3-Year Barclays Municipal Bond  Index and the Barclays Long Municipal Bond Index so far this year.   Perhaps our previous observation of the eight to ten year maturity range being the fulcrum of the past year’s municipal yield curve flattening explains the relative sweet spot and protective nature of intermediate maturity municipal bonds.


Munis by the Numbers                                                  


(Sources: Bloomberg, Barclays Capital)

When does 2.70% = 4.77%?  When you are an individual investor subject to the top Federal income tax brackets and you capture a 2.70% yield from tax-exempt municipal bonds. 

The 2.70% yield stated above is our conservative estimate of an average yield-to-maturity for a municipal bond portfolio constructed under present market conditions with the following parameters:  all investment grade credits, average credit rating A1/A+, all bonds mature within 15 years, average maturity 6 to 7 years, portfolio duration range 3.7 to 4.7 years. 

10-year High Grade Municipal bond yields as a percentage of 10-year Treasury bond yields:  101% (compared to an average ratio of 98% for the past ten years).

-0.40%   March total return of the Barclays 3-Year Municipal Bond Index (+0.37% YTD, +1.51% for all of 2014)
-0.45%   March total return of the Barclays 5-Year Municipal Bond Index (+0.65% YTD, +3.19% for all of 2014)
-0.57%   March total return of the Barclays 7-Year Municipal Bond Index (+0.86% YTD, +6.09% for all of 2014)
-0.94%   March total return of the Barclays 10-Year Municipal Bond Index (+0.65% YTD, +8.72% for all of 2014)
-1.31%     March total return of the Barclays Long Municipal Bond Index (+0.63% YTD, +15.39% for all of 2014)


Thomas P. Dalpiaz has over thirty years of experience in the municipal bond business, with much of that time spent as a portfolio manager for private clients, financial advisors, and institutional investors. He was previously a senior portfolio manager with Advisors Asset Management, Neuberger Berman, Sage Capital Management, and Weiss, Peck & Greer. Prior to becoming a portfolio manager, Tom was a municipal credit analyst at Weiss, Peck & Greer, as well as Merrill Lynch and The Bank of New York.  Tom has had a series of articles published in Forbes and he is the author of “Managing Municipal Bond Portfolios for High Net worth Investors,” a chapter in The Handbook of Municipal Bonds, one of the Fabozzi series of investment books.  Tom has been quoted in the Wall Street Journal, Barron’s, and in Bloomberg News. He has also been a guest expert on Fox Business News, Bloomberg Television, and NPR’s “On the Money.”  Tom holds an MBA in Finance and a BA in History, both from Hofstra University. He also holds FINRA Series 7, 24, 63, and 65 licenses.

Granite Springs Asset Management, LLC is a privately held SEC-registered investment advisor that specializes in fixed income portfolio management and tactical asset allocation investment strategies for private clients, family offices financial advisers, insurance companies, pension plans, and other institutional investors. The investment philosophy at Granite Springs is based on two principal beliefs; that asset allocation is the most important investment decision and; that disciplined risk management leads to superior returns over time.

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