Monthly Overview – Turbulence Ahead?
A late-month rally allowed munis to post positive performance numbers in June, returning 0.09%. For 2014, performance has been an impressive 6.00%. However, recent monthly returns have been on a declining trend, and we think munis will likely struggle to duplicate the strong H1 2014 performance. Coincidentally, this slowdown in performance comes as the Federal Reserve enters a period where it could be considering how to best communicate its monetary policy "exit" strategy without invoking a repeat of the 2013 "taper tantrum." The Federal Reserve, at its most recent meeting, repeated that current accommodative monetary policy will remain in place for a considerable period as the economy slowly recovers. That being said, with recent stronger employment and inflation readings, the more-hawkish members of the Federal Reserve Board are growing restless, analysts are grinding their teeth over the Federal Reserve falling behind the (inflation) curve, and even Fed Chair Janet Yellen warned against becoming complacent because rates won't stay low forever. We still believe interest rate normalization will take years and will be an uneven process. However, as the Fed refines its messaging plan, markets could experience some turbulence. We recommend investors take advantage of these periods of volatility to add bonds to their portfolios at cheaper prices.
In this issue of Municipal Market Insight:
Muni pillars of support have recently shown signs of stress. We offer our thoughts, or concerns, on what we see as some cracks beginning to form in some of the factors which have been supporting the muni market in recent months.
Pension funding shortfalls roil the muni markets and scare investors. We address the Pension Funding Conundrum and provide clarity and our perspective.
Has anyone heard there is an election this fall? We provide our thoughts on the recent defeat of former House Majority Leader Eric Cantor and the possible implications for the muni market.
Our monthly Commonwealth of Puerto Rico Update covers the government's Public Corporation Debt Enforcement and Recovery Act, which is designed to allow certain government-related corporations to renegotiate terms of outstanding debt. We also discuss the government's rapid response to budget shortfalls.
Insurance Commentary reviews a motion filed by several insurers to delay Detroit's bankruptcy trial.
Municipal Market Headline Events provides clarity on recent news items covering Detroit and the State of Michigan, the State of New Jersey, New York State and the City of New York Metropolitan Transit Authority, San Bernardino, CA, and the Virgin Islands.