Since our last market update,
the yield on the 10-year Treasury Note has climbed past 4.00%, up from
3.43% on April 14th. During this same period, the yield on 10-year, "A"
rated municipals has declined from 4.27% to 4.10%. Why are the municipal
and taxable markets moving in opposite directions? This is directly related
to the placement of the massive municipal supply* from early Spring, which
was running roughly 30% higher than average supply from early March through
late April. Also contributing to these movements is growing investor confidence
in the credit markets and therefore, a diminished demand for U.S. Treasury
securities.
We expect this dynamic to persist and for the markets to settle in at their historical ratios where municipals yield around 80% to 85% of same maturity Treasuries.
It appears that the Federal Reserve may take a pause in its rate cutting at the June 24/25 meeting, weighing growth and inflation concerns about equally as evidenced by recent Fed Governors' comments. Translation: expect a slow, grinding trend to the upside for yields but you shouldn't be waiting for a significant spike in rates. The slowing economy is expected to eventually temper inflation concerns, which should limit any upside yield potential, especially in the municipal bond sector.
Peering further ahead: It's an election year and I think most everyone agrees that tax code changes will be in the works for 2009. That (probable) fact coupled with an aging population shifting from growth assets to income producing assets, likely means that municipal bonds will attract a larger audience. So far, supply has been adequate and the generous municipal yields, relative to their taxable cousins, have rewarded those who have been in the market.
As we at Bernardi Securities have said for nearly 25 years, "Our crystal ball is as clear as everyone else's" but we still think this market offers a unique opportunity. High quality municipal yields are near, or in some cases, higher than same maturity Treasury yields. If you have been sitting on the sidelines waiting for clarity, now is the time to commit some funds to this market. Call your Bernardi Securities Investment Specialist for more information.
We expect this dynamic to persist and for the markets to settle in at their historical ratios where municipals yield around 80% to 85% of same maturity Treasuries.
It appears that the Federal Reserve may take a pause in its rate cutting at the June 24/25 meeting, weighing growth and inflation concerns about equally as evidenced by recent Fed Governors' comments. Translation: expect a slow, grinding trend to the upside for yields but you shouldn't be waiting for a significant spike in rates. The slowing economy is expected to eventually temper inflation concerns, which should limit any upside yield potential, especially in the municipal bond sector.
Peering further ahead: It's an election year and I think most everyone agrees that tax code changes will be in the works for 2009. That (probable) fact coupled with an aging population shifting from growth assets to income producing assets, likely means that municipal bonds will attract a larger audience. So far, supply has been adequate and the generous municipal yields, relative to their taxable cousins, have rewarded those who have been in the market.
As we at Bernardi Securities have said for nearly 25 years, "Our crystal ball is as clear as everyone else's" but we still think this market offers a unique opportunity. High quality municipal yields are near, or in some cases, higher than same maturity Treasury yields. If you have been sitting on the sidelines waiting for clarity, now is the time to commit some funds to this market. Call your Bernardi Securities Investment Specialist for more information.
Jeffrey D. Irish – Vice President
*Municipal Supply information
from The Bond Buyer “Visible 30 Day Supply” was at its peak
of $19.9 billion on March 5th compared to the average of about $15 billion
for all of 2007.
