The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P AMT-Free Municipal Series 2016 Index. The Fund will mature on a pre-specified date, however the Fund does not seek to return any predetermined amount at maturity. The Fund will invest in AMT-Free, investment grade, noncallable national municipal bond debt.
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Puerto Rico has sold $3.5B in tax-free bonds, above the $3B that the Commonwealth planned to sell, with the high yield of 8.727% helping to attract $16B in orders from 270 investors despite the risks - the government has been grappling with existing debt of $70B.
The debt will mature in 2035 and provides Puerto Rico with up to a year-and-a-half of liquidity.
Retail investors are likely to see about twice as much in "leakage" when buying and selling municipal bonds as they do for corporate paper, according to the WSJ, and regulators - who bypassed the municipal market while helping reshape how Wall Street works - have this asset class in its their sights.
"We spend an awful lot of time on the equities side of the market where spreads are counted in pennies - and in the muni market, spreads are counted in dollars," says SEC Commissioner Michael Piwowar.
For their part, brokerages say munis cost more because they trade in lower volume and for smaller amounts than other securities.
"You think of how the retail industry has gone from the local grocery store to Wal-Mart to Amazon," says a municipal bond wealth manager. "In municipal bonds, we're still shopping at the local grocery store."
Puerto Rico's $3B debt issuance could happen as soon as tomorrow, reports Bloomberg. It would be the U.S. territory's first sale in two years and follows a cut in its credit rating to junk last month (by all three major agencies)
The muni market overall is expected to see $11B in long-term offerings this week, the busiest pace since late last year as 10-year muni bond yields fall to their lowest level since June.
Closely watched in the municipal bond market and by the monolines (MBI, AGO, AMBC) will be today's decision by a U.S. bankruptcy judge on whether Detroit's pledge to pay on general obligation debt is binding or whether it's merely a promise which a broke city can walk away from.
The impact could be a large one as GO debt has forever been considered secured debt and thus among the safest places to put money. Emergency manager Kevyn Orr has deemed about $410M of city GO paper as unsecured debt, and Detroit on October 1 defaulted on payment.
On the hook for millions of dollars, municipal insurers contend they and bondholders have first call on the property tax revenue necessary to make good on the bonds.
Also maybe coming today will be Orr's plan for restructuring and a bankruptcy exit.
Fitch becomes the 3rd and last of the major ratings agencies to cut Puerto Rico's municipal debt to a junk rating. "Recent downgrades have triggered new liquidity requirements and lowered expectations for the market available for the commonwealth's debt going forward."
In the meantime, Puerto Rico is going through with its debt offering, and has hired Barclays to lead the sale.
The junk ratings look to be forcing about $13B of Puerto Rico's $70B in muni debt out of Barclays' benchmark municipal bond index, and passive ETFs will likely be forced sellers of Puerto Rican paper, though most mutual funds can continue to hold.
Moody's says Puerto Rico's economic malaise, underfunded pension obligations and high deficit "have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained."
The Moody’s downgrade pertains mostly to the GO bonds, which effectively triggers downgrades on all subsequent notes and bonds.
It was just a tiny $103M, but municipal bond mutual funds and ETFs last week ended a streak of 33 consecutive weeks of outflows, according to Lipper. The $103M gain compares to outflows averaging $1.5B-$1.9B over the previous month.
The value of municipals - with longer-dated high-grade paper trading above that of comparable Treasury issues (and that doesn't include adding back the tax benefit) - has been noted often (here and here for example) over the past weeks, and many closed-end funds are trading at discounts to NAV.
Ranking about dead last a year ago in Barron's handicapping of where to go for yield, municipal bonds climb nearly to the top for 2014. Long-term issues yield 4.5-5%, towering over the 30-year Treasury at 3.8% ... and don't forget the tax exemption. Credit worries are high, but the "real news is that the credit profile of local governments throughout the U.S. will improve as property valuations rise, local sales and income-taxes increase, and major reform of public employee pension plans accelerates," says John Loffredo, co-manager of the MacKay Shields Municipal High Yield Fund.
Topping the list are the best performers from last year: dividend stocks. Even after a big rally, plenty of blue chips yield more than the 10-year Treasury and payouts are still low, says S&P's Howard Silverblatt, who sees a double-digit rise in cash payouts this year.
Near the bottom of the list this year after a big move in 2013 are MLPs, which trade for nearly twice the valuation of utilities and telecom, based on Enterprise Value/EBITDA. Yields are tasty at 5.5%, but many MLPs barely cover their payouts - a contrast to the vast majority of dividend-paying corporations. Stick with MLPs comfortably covering their distributions like EPD and PAA.
Municipal debt is down 2.58% so far this year, putting the asset class on course for its worst annual performance since 1994. In contrast, muni debt provided a return of 6.78% last year and 10.7% in 2011.
Detroit's fall into bankruptcy protection has had a major effect, with problems in Chicago, Illinois and Puerto Rico adding to the downward pressure. There's also been a broad sell-off in bond markets as investors have prepared for Fed tapering.
However, municipal debt tied to real-estate development, which is known as "dirt bonds" and is fairly risky, has had a decent year amid the recovery in the housing sector, rising 1.1% through December 23.
The combination of credit issues and rising interest rates have municipal closed-end funds selling at near-record discounts (10%+) to net asset values, says Doug Kass, and at near-record pretax-equivalent yields vs. taxable bonds. Those conditions, says Kass, constitute a margin of safety and he's an owner of: NMA, NAD, ETX, BKN.
Illinois' Senate and House have approved a revamp of the state's retirement system, one of the most underfunded in the country with a gap of almost $100B.
The plan is designed to fully fund Illinois' five pension systems by 2044 by saving an estimated $160B over 30 years. Workers and retirees face cuts, the retirement age for younger staff will rise, and the state will increase its payments by $60-70B.
Unions are strongly opposed to the proposals and intend to go to court to stop them from being enacted. One argument is that the overhaul violates the state constitution by lowering pension benefits.
Still, the Illinois revamp could provide a template for municipalities that are grappling with similar problems. Chicago, which has a pension shortfall of $19.5B, has been watching the situation with interest. (Previous)
Municipals are "a credit market with a rates problem," says Morgan Stanley's Michael Zezas, seeing a base case (60% probability) of total returns of -1.7% to -4.1% in 2014. The bulk of the negative returns should come early, he says, thanks to the 10-year Treasury yield rising to 3.45%.
The bull case - in which the economy slows and the 10-year yield slides to 2.3% - has munis returning between 3.5% and 6%. The bear case - growth jumps and the 10-year rises above 4% - sees losses of 6.2% to 10%.
When to jump in? When "loss cushions outpace expected rate increases," he says, and when "market duration has extended."
Rejecting calls to dismiss the case, a Detroit judge finds the city acted in good faith when it filed for Chapter 9 bankruptcy. The city, he rules, could not have negotiated in good faith with its creditors without the filing. Pensions are unsecured creditors, says the judge, and thus not protected from potential cuts.
Assured Guaranty (AGO +0.4%), Ambac (AMBC -1.1%), and MBIA (MBI -0.1%) have all fallen about 1% since the ruling.
The unions and pension funds are likely to appeal the decision.
“It is indeed a momentous day,” says the judge, Steven Rhodes. “We have here a judicial finding that this once proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start. I hope that everybody associated with the city will recognize that opportunity.”