11.20.14: Bond Market Update: Municipals outperformed Corporates Handily in 2014

We’ve had a tougher year in our balanced and fixed income accounts, mainly because like the 99% of the other money managers in the universe of money management, we thought interest rates would rise again this year, (sentiment should have been a huge tell at this time last year) and they didn’t.

Given the 30 – 35 year lows in interest rates, we’ve maintained a position in the TBF, or the unlevered Treasury short position.

However, the one thing we’ve done right this year, even in tax-deferred accounts like IRA’s and such, is that we’ve maintained a nice weighting in municipal bonds, whether through two closed-end funds we like to use ( Nuveen’s NUV, and Blackrock’s MEN), but also through a position in John Miller of Nuveen’s High Yield Muni Fund, as well as the HYD or the Barclay’s Market Vector High Yield Muni ETF.

We’ve been out of taxable high yield for some time, although we’ve traded the HYG for short periods.

My own opinion is that the bond markets this year have been far harder to navigate than the stock markets.

Here is a quick rundown of performance of some of the various fixed income markets:

The first column is year-to-date (YTD) return, and the 2nd column is 1-year return:

HYG:+2.83%, +3.86% (iShares taxable high yield ETF)

HYD: +13.74%, +12.66% (Barclay’s High Yield Muni ETF)

AGG:+5.04%, +4.61% (Barclay’s Aggregate, the bond market equivalent of SP 500)

MUB: +8%, +7.47% (iShares National Muni Bond ETF)

Here are how some of our individual muni vehicles did:

NUV: +9.42%, +11.2%

MEN: +15.78%, +19.70%

HYMB: +15.71%, +14.36% (Nuveen SPRD High Yield Muni Bond ETF, as proxy for John Miller’s Nuveen High Yield Muni open-end fund)

There is a lot of sectors we haven’t covered like TIPS, and Mortgages (MBS) and Preferred Stock (PFD), but checking some Bespoke data from their Wednesday night Fixed Income Weekly, TIPS and MBS are up 4% – 5% YTD.

The big disappointment for 2014 is probably taxable high yield, and a lot of that is probably Energy-related given Energy’s weight in the high yield benchmarks.

My own rationale for the muni outperformance is that 2013’s Taper announcement coincided with the Detroit bankruptcy in August – September of ’13, and the market just got hammered. While Puerto Rico is still an issue and will be in 2015, there has been time to clean out that paper. Plus state finances have improved, as have¬†municipalities ability to refi existing debt. The Puerto Rice Electric Power’s (PREPA’s ?) seem to be on a lot of radars, as they first to default, possibly as early as Spring ’15.

We wrote about the muni closed-end fund discounts way back here, before anyone was noticing. (Actually, after re-reading the piece from August ’13, it looks like there was some press on the closed-end fund discounts.)

2015 could be a different story.

No question, Energy’s woes and general liquidity issues hampered the taxable fixed income market in 2014.

We even bought John Miller’s Nuveen High Yield Muni Fund for IRA’s and pension accounts, given at one point during the summer, the fund’s current yield was higher than the HYG current yield.

We have no early thoughts on 2015 in terms of bond sectors or asset class positioning. The current yields on NUV of 4.60% for investment grade muni’s and MEN’s 6.7% (with leverage) still look ok to me.¬† We’d be a quick seller of MEN should the short-end of the Treasury market start to turn.

Be forewarned: the big issue with municipal high yield is the very long duration of this market. A lot of this is 30-year paper or longer, and highly illiquid. Some of it will be called, or refi’ed for sure, but the duration is a lot higher than taxable-equivalent funds.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




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