September Turbulence & Outperformance

Last month was a turbulent experience for the Treasury markets, though municipals have been able to sustain a relative rally. The catalyst to each ebb and flow of last month’s bond market has left our purview as the debt ceiling crisis and brinksmanship in D.C. rattle markets today. However, as bond market investors, we cannot lose sight of last month’s market influences and how they may impact us in the future.

Municipals outperformed Treasuries

The 10-year Treasury note rose above 3% early in the morning of September 6th. At that point it was already up 0.22% in yield for the month and up 1.25% in yield year-to-date. As of October 10th, the 10-year Treasury has round-tripped and more, coming back down to 2.71%. The cause for the bond market rally began with Larry Summers withdrawing his name for consideration for Fed chair – as he was perceived as anti-QE – and then was considerably augmented after the Fed decided against tapering during their September FOMC meeting. On that very day the 10-year Treasury dropped from 2.86% to 2.68%. The municipal market displayed less volatility and generally outperformed Treasuries during September. The 10-year municipal/Treasury yield ratio began the month at 110% and is currently at 103% (i.e. municipal yields were 110% of the 10-year Treasury). Although municipal bonds outperformed Treasuries in September, yields are still at higher nominal rates before factoring in the effective value of the federal income tax exemption.

Fed misinterpretation & lingering volatility

Why such turbulence? There are numerous reasons, of course. A major contributing factor is investor misinterpretation of Federal Reserve communications related to its monthly purchases of mortgages and bonds. From inception, the Fed communicated to investors its policy would be “data-dependent”. However, the market inferred from Fed commentary over the last several months that it was comfortable enough with economic data to begin to taper these monthly purchases. Those expectations contributed greatly to the 10-year Treasury bond rising to 3% in early September. When the FOMC released their statement on September 18th it became apparent to readers that tapering would not occur in September, leading to this month’s rally.

Until the Fed is comfortable with the underlying economic strength – both job creation and price stability – we expect their unconventional policies will continue. Expect volatility to linger as well.

As always, please call us if you have any questions or would like us to help you review your portfolio.


Matt Bernardi
Bernardi Securities, Inc.
October 10, 2013