In assessing the overall marketplace, it is clear that we have entered into a new lower interest rate paradigm. Slower growth forecasts and fewer inflation concerns have created a growing realization that short-term interest rates could remain at very low levels for several years. As a result, rate-shocked investors have struggled to find direction while their investible cash continues to pile up. On the taxable side, the Build America Bond Program has provided compelling alternatives for investors who were once limited to corporate debt or Treasuries. However, tax-free investors have been forced to become more creative, often by opting for slightly riskier credits, moving out on the yield curve –or- by investing in longer-maturity zeros and convertible zeros, which generally offer substantially higher yields than current coupon issues.
So what should investors do? Should you let your investible cash languish in low-yielding short-term money market alternatives and wait for better yields to hopefully arrive? MainLine West offers a few suggestions for your municipal portfolio:
- We would recommend easing into the market over time, taking advantage of pockets of market weakness or heavy supply to put cash to work.
- We see better values in the new-issue market where, assuming institutional bond access, markups can be kept to a minimum.
- We continue to favor a wide range of better-quality revenue bonds, particularly those defined as “essential service.”
- We also see value in other revenue sectors including: public power issuers, stronger airports, high-profile hospital issuers and state single family housing issuers.
- We feel that convertible zeros are still a great alternative. The lack of demand from bond funds, which generally require coupon income on bonds they purchase, and their unique structure, have made convertibles some of the best relative values in the entire muni market.
- We continue to see many portfolios with far too much cash, or holding a large proportion of bonds coming due within the next two years. Investors in this position are earning a very low effective yield and steps should be taken to build such portfolios out into a more appropriate average maturity, with higher yields to maturity, over time.
While lower interest rates have added additional challenges to the municipal marketplace, strategic management can steer a portfolio toward better yields without incurring additional credit risk. MainLine West can help you devise a strategy to navigate an uncertain marketplace and best position your portfolio in the current environment. We search the municipal marketplace to deliver you a wide selection of offerings from our inventory. Our inventory is screened through our trading expertise, research and credit quality checks to provide the best offerings available.