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| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| More |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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The Safety of Cities |
Don't let inflation worries drive you from municipal bonds, says one money manager.
Fear of runaway inflation has some predicting trouble for bond markets. In such a scenario, rising interest rates could crush otherwise safe municipal bonds.
Tom Dalpiaz, who manages bonds at Advisors Asset Management in Monument, Colo., sees a "cloud of uncertainty" hanging over municipal bond investors. They're worried about inflation, interest rates, the ability of governments to pay their bills, the demise of bond insurers like MBIA ( MBI - news - people ) and Ambac ( ABK - news - people ) and a host of other problems, Dalpiaz writes in a commentary on the municipal bond market given to clients this week. His basic message: municipal bonds aren’t all that scary.
Once frozen like other credit markets after the collapse of Lehman Brothers ( LEHMQ - news - people ) a year ago, the municipal bond market has since turned in one of its best performances. Bonds from states and cities have posted a 14% return this year through September 16, according to index data from Banko f America Merrill Lynch. That beats their returns over the same period in the last 20 years, according to a Bloomberg analysis.
A surge in inflation would end this rally, eroding the value of bond payments. Higher interest rates, the usual response to inflation, would push bond prices down and yields up. But the current build-up in bank reserves and government spending isn’t enough to spur high inflation. Dalpiaz argues that rapidly rising prices are usually teamed up with "strong consumer demand, strained capacity in a variety of industries, real pricing power by businesses, little or no slack in labor markets, rising wage and commodity price pressure, and fairly robust economic growth generally." None of these look strong right now. (see, "Flat Times For Consumer Prices")
That isn't to say Dalpiaz sees no inflation in the future; he just doubts it’s "around the corner." Bond traders expect annual inflation of 1.8% over the next decade, to use yields on Treasury inflation-protected securities as a guide.
Falling house values and tax receipts are straining local government budgets. Even so, states and cities rarely default on their debts, Dalpiaz says. States and cities can raise taxes, dip into rainy day funds, sell assets or privatize services to fix financial shortfalls.
Dalpiaz doesn’t recommend specific bonds or other investments. But people who don’t want to pick individual securities can buy shares in mutual funds and exchange-traded funds. The iShares S&P National Municipal Bond Index Fund ( MUB - news - people ) tracks the Standard & Poor's index. It has gained 5.2% this year, without including monthly dividends. The tax-free yield is 3.2%, the same as 5.4% for a taxable bond.
Those worried about inflation can aim for funds with shorter maturities, so that cash from maturing bonds could roll into higher-yielding ones as rates rise. For instance, the SPDR Barclays Capital Short Term Municipal Bond ( SHM - news - people ) fund has an average maturity of 3 years. It currently yields 1.2%.
A more exciting ride can be found in funds focused on California, the state with the lowest credit rating and perennial budget troubles. The SPDR Barclays Capital California Municipal Bond exchange-traded fund ( CXA - news - people ) tracks tax-exempt California municipal bonds and has climbed 9% in price this year. It yields 3.8%.
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| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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