Carnegie Market Blog

 

Muni Mayhem and Housing Starts

Posted by Brent Luce on Nov 17, 2016 4:38:29 PM

 Muni Mayhem

 Since Donald Trump won the election last week, there have been measurable moves in several sectors and investment themes.  One of the most pronounced has been the move in the municipal bond space.  As the chart below illuminates, the amount of municipal debt for sale has spiked to an all-time high.  Not surprisingly, municipal debt funds have dropped notably in accord with this new influx of supply.   So, why is this happening?  For starters, it is worth considering who is invested in municipal bonds.  With the advent of ETFs and the proliferation of mutual funds, access to this space is easier than ever, so there is a new constituency of shorter-term investors in municipal bonds who are there as a result of yield chasing– similar to what I have written about related to consumer staples stocks.  Additionally, with a new expectation (and tangible evidence) of higher rates going forward, municipal bonds have become less attractive to many investors.  As such, investors and traders are rotating out of municipals and into areas that will benefit (or at least not get punished) by a higher rate environment.  As if these two pressures were not enough, there is a third dynamic taking place.  One of the things that makes municipal bonds attractive to many investors is their tax-exempt status.  Investors believe that the new president will lower tax rates.  If tax rates are lower, tax-free investments become less attractive.  RELATED:  Can the U.S. Bond Market See a Decade of Flat to Negative Returns?

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Topics: Interest Rates, Municipal Bonds, Housing Starts

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