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Municipal Bonds Surge Into the New Year – December
2011
Municipal bond yield levels ended December and the
year at the lowest nominal levels in several decades.
Elements of confusion
In December of 1981, I completed the first
year of my nascent municipal bond career somewhat confused
by 12% taxable money market rates and near 12% non-taxable
20-year, “AA” rated bond yields.
Last week, with 30 years of bond market experience behind
me, I reflected on the significance to you, our clients,
of money market rates near zero, 2% taxable 10-year
U.S. government bond yields and mid-maturity, non-taxable
bond yields flirting with a 2% handle. My experiences
aside, elements of confusion remain. I have many thoughts
on the topic and will share some with you in our upcoming
January “Year in Review” publication.
Demand surging into the new year, then supply
The month of December saw a surge in demand for municipal
bonds coupled with a paltry (by historical standards)
supply. We look for this dynamic to continue into the
early part of 2012, keeping municipal bond rates at
or near current levels. New issue supply will increase
in 2012 from 2011 levels, but we do not expect the supply
surge to occur until later in the year.
2011 municipal bond returns beat most stock
indices
Mid and longer duration municipal
bond portfolio returns in 2011 were solid and beat
most stock indices on a nominal, pre-income tax basis.
For taxpayers in a 28-35% federal income tax bracket,
the effective, after-tax returns for most portfolios
were excellent. It is unrealistic to expect similar
returns from these same portfolios in 2012.
Eight straight quarters of tax revenue growth
State and local governments received some good news
in December with the release of the Q3 statistic that
tax revenues rose 4.1% in the quarter – making
for eight consecutive quarterly gains in this category.
Additionally, the gain was driven by increases in property,
sales and personal income taxes. This eases, somewhat,
the pressure on budgets of state and local governments
for now.
Good news for the municipal bond market and a nice way
to start 2012.
On behalf of everyone at Bernardi Securities, Inc.,
thank you for your continued confidence and we wish
you a happy and healthy 2012.
Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
January 3, 2011
RELATED
TOPICS: Bond
Portfolio Management
This document has been
prepared by Bernardi Securities, Inc. (BSI) for our clients
and other interested parties. Within this document, we
may express opinions about the direction of financial
markets, investment sectors, trends, and taxes. These
opinions should not be considered predictions of future
results, and are subject to change at any time. Past performance
is not indicative of future returns. Nothing in this document
represents a recommendation of any particular strategy,
security or investment product. This information is provided
for educational purposes only and was obtained from sources
considered reliable, but is not guaranteed and not necessarily
complete. BSI offerings are made by prospectus or official
statement only. Income may be subject to state and local
taxes and the federal alternative minimum tax. Additional
risks associated with investing in municipal bonds include
credit risk, interest rate risk, and reinvestment risk.
Please consult your tax professional regarding the suitability
of tax-free investing. Please consult your investment
specialist for more information.
Municipal bonds not FDIC insured * May lose principal
* Not appropriate for all investors
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