Muni Market Views For Second Half Of 2016 (Video)

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TOM BUTCHER: The municipal bond market has had a pretty good six months so far this year, despite negative headlines. What does the rest of the year hold for it?

JIM COLBY: The municipal marketplace has had an unusually strong first six months of the year, based upon what we anticipated way back in December 2015. The outlook for the remainder of the year is probably similar to what we have just experienced. We've come through six months during which every move by the Federal Reserve has been dissected. The wording of their statements, that is, in terms of whether they're going to raise rates at all this year.

Some aspects of the economy are strong and some are not, which doesn’t empower the Federal Reserve to make any moves anytime soon. Even if they do, I suggest that the outcome of the remaining six months of this year are going to be very similar to the beginning of 2016. Munis have had strong performance with continued strong demand and a modestly raised level of new issuance coming from states and municipalities. I think that performance will continue to be good.

During the first half of the year, general municipal bond performance was positive. It was up over 4%. That’s general market product. In high yield, the performance was better than that: up over 7%. We probably are not going to experience moments akin to those that occurred in the first six months of the year, e.g., Brexit and the passing of the Puerto Rico bill that staved off the inevitable default and a worrisome outcome similar to that of Detroit two years ago. Such elements notwithstanding, the market put in a solid performance and I think the remainder of the year also stands to potentially come out very well for munis.

BUTCHER: What do these strong inflows tell us?

COLBY: The inflows tell us a couple of things. First of all, investors are confident, or at the very least, in terms of the performance of the municipal marketplace, investors are confident that the returns and tax-free income they receive may be as good as, if not nominally better than, what they would receive elsewhere. Don't forget that in some of the strongest economies of Europe, there are negative interest rates. Even foreign investors, such as corporate, banking, and insurance institutions, are looking at the United States as a place to gain positive returns and positive cash flow. They've come to munis and recognize that munis comprise a very strong investment class. They enjoy positive returns. Foreign investors don't benefit from a tax exemption, but nevertheless, they may book some positive income. That has accrued to the strong demand for munis so far this year.

BUTCHER: Can we go back to Puerto Rico? Can you say some more about what's going on and how it's affecting the markets now?

COLBY: As many people know, Puerto Rico has defaulted on a good portion of their obligations, and what led up to the end of the second quarter of this year was an effort by Congress to pass a bill to somehow provide support to the struggling commonwealth. The bill got signed by Obama on June 30 and what it did was stay and prevent lawsuits from encroaching on the commonwealth and destroying the commonwealth's ability to operate independently.

However, the impact is severe, which means that investors holding commonwealth obligations are not going to get paid until the control board that was promised in the bill outlines a series of economic activities to enable the commonwealth to regain financial footing. Puerto Rico has been an enormous issuer of bonds in the municipal marketplace.

What's remarkable about all these events leading up to June 30 is that the marketplace as a whole has been able to set aside concerns for the outcome of Puerto Rico. Yes, it will have some negative impact upon some fund companies and holders of the commonwealth’s debt. For the most part though, the market has continued to perform well. I think that over the next two or three years, until these issues get sorted out on behalf of the commonwealth, the municipal market will continue to operate and function very well without concern for one of its biggest issuers no longer being involved on a day-to-day basis.

BUTCHER: Thank you very much.


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