“To say that bonds are under pressure would be an understatement.” In a recent Insight titled, What’s Happening to Bonds and Why?, PIMCO’s Mohamed El-Erian offers up an excellent recap of the ongoing turmoil in fixed income markets. The piece is well worth the few minutes of your attention, particularly if you are “one of those” that have been dumping bonds for weeks. El-Erian points to multiple factors simultaneously weighing on Treasuries – policy, fundamentals, flows and technicals.
We touched on each of these factors in a letter to investors earlier this week as they pertained to our investment thesis in the municipal sector. The full letter, Muni Diaries, is available here. The folks at PIMCO appear to be on the same page:
Technical dislocations are also evident in municipal bonds, where the impact of the rates sell-off has been accentuated by credit concerns derived from developments in Detroit and Puerto Rico. Here, the federally tax-free AAA segment of the market is trading at a yield ratio of 1.16x comparable maturity Treasury yields (Figure 5). This ratio was 1.0x at the end of April 2013 and a tighter 0.9x earlier in the year. The yield movement on AA federally tax-exempt municipals has been equally notable – the ratio of yields has jumped from 1.07x for 30-year Treasury yields as of end-April 2013 to 1.24x currently.
Yesterday, Bloomberg reported Munis Extend Biggest Rally Since April on Puerto Rico Purchases. We still have a long way to go, but we’ll take what we can get for now. While, “There is nothing exciting about a 3% pre-tax return on capital,” as we noted in our letter this week, a number of opportunities in the municipal sector are compelling enough to make Rerun Dance!