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FYI: Municipal bond funds have been on a tear, witnessing 51 consecutive weeks of net inflows as of the third week in September (the second-longest run since Lipper began tracking weekly flows in 1992). With equities hitting new highs and related dividend yields on the decline, nervous investors — many of whom may believe the recent equity rally has gotten a little long in the tooth — have been flocking to the relative safety and high tax-equivalent yields provided lately by municipal debt. The question is, will the rally in the asset class continue, or are its winning ways nearing an end?
Sept-Nov is traditionally the longest weak period of the year for munis. That they're just slightly down on NAV with the runup in T rates of the recent past during a seasonally weak period speaks pretty well for the class, IMHO.
For someone who wants to start a significant position or add a relative lot to an existing one, I'd prob'ly watch and wait -- watch the 30y T and the muni indexes for a good entry point and provisionally wait a bit, most likely sometime toward the end of the year.
Like virtually all other bonds, munis have enjoyed the many years of lower rates. I check individual muni prices regularly, and seldom if ever find an investment-grade muni that is not selling 2-3% above par. While I won't say there is a bubble, it is clear that the easy money was made over the last 10-20 years. Most managers will tell you they would be happy to be able to pay investors their coupon and just hold NAV steady in coming years. We are quite cautious with all bonds right now, using shorter-duration funds and going with short-to-intermediate term funds. And bond fund expenses are a critical component. A fund that charges 75-100 bps or more has a huge headwind facing them as rates move higher. M* lists 222 short-term muni funds, with fully one-third of them having expenses of 75 bps or higher, some higher than 150 bps. Of course, these funds were SOLD to investors by banks and other commission-driven entities.
Comments
For someone who wants to start a significant position or add a relative lot to an existing one, I'd prob'ly watch and wait -- watch the 30y T and the muni indexes for a good entry point and provisionally wait a bit, most likely sometime toward the end of the year.