Will May and June be good for munis?

MAY 14, 2012
• According to S&P: - Upgrades of muni bonds outpaced downgrades 121 to 83 in Q1 2012. - Credit quality in U.S. public finance appeared to stabilize overall in Q1 2012. - The gulf between stronger and weaker credits may grow in some sub-sectors. • Depending upon whose definition you use, between 6 and 17 issuers "defaulted" in Q1 2012, about the same number as in Q1 2011. • S&P revised its outlook to positive from stable for California — one of the three largest U.S. issuers of municipal bonds. • The Federal Reserve Board has clarified that the Volcker rule will not take effect until July 21, 2014. With flows continuing to favor municipals, BBB-rated munis are receiving recommendations as their spreads to investment-grade muni bonds continue to compress. Even in a rising rate environment, the less volatile BBBs have historically outperformed investment-grade munis and have provided a potential cushion to a diversified portfolio. Historically, May and June have been strong months for municipals due to reinvestment opportunities. Yes, I expressed that same theme at the end of 2011, but I continue to see some slack in new issuance, setting the stage for a continuation of the positive relationship between demand and supply. I still see some soft spots in the road ahead, specifically with some smaller, local municipalities, but with modest expectations, I believe we should be able to comfortably reach the end of next quarter. James Colby is the senior municipal strategist for Market Vectors ETFs.

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