Municipal bond yields ended the month at higher levels than where they began the month, resulting in a negative monthly total return number for most portfolios. This decline in portfolio value was more pronounced on higher duration portfolios and bond funds as you would expect.
The higher municipal bond yields resulted from:
- The continuing sell-off in the U.S. Treasury bond market
- Massive redemptions of municipal bond funds
- General apprehension of municipal credits
The continuing unease that currently pervades the municipal marketplace was fueled in part by Congressional discussions on the merits of introducing legislation that allows states to file for bankruptcy. New issue volume declined significantly and this factor prevented prices from falling further and, in fact, contributed to a rebound in bond prices over the final 7 to 10 days of the month. The run up in bond prices at the end of the month, however, was not enough to offset the earlier losses.
The market remains volatile in the New Year. Liquidity is generally thin and sporadic – depending greatly on the specific issue out for bid, the almost daily rumors out of Washington D.C. and apocalyptic predictions about municipal bonds. Expect more of the same until we have some clarity on possible legislation affecting the marketplace. These factors make the municipal bond market attractive for income oriented portfolios, but challenging for total return investors.
Bankrupt Vallejo, California continued its march towards solvency and filed a restructuring plan with the court overseeing its Chapter 9 proceedings. It is a complicated plan without question, and certain creditors will have to absorb different percentages of haircuts on their claims. Municipal debt holders, however, are treated favorably per the plan and that is a significant development in our view.
Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
For more information, contact your Investment Specialist.