As economy downshifts, municipal bonds remain attractive
The third quarter was marked by a rise in interest rates across the entire yield curve, particularly on the short end, as the
As we write this on
From previous disasters we know that the economic impact is severe and portends a big downshift in the economy of
The storm in the bond markets has also continued, with the
What we glean from data is a bond market that spent the quarter in retreat. This was as much from the tough talk of the
The difference between two-year yields and 10-year yields moved from -7 basis points at the start of the quarter to -40 basis points at the end of the quarter. The negative yield curves don't forecast recessions – they cause them. Banks cannot borrow short and lend long and make a positive spread, so they start to curtail credit.
Recently, the difference between 10-year Treasuries and 30-year Treasuries also turned negative. The last time we saw that was in early 2000 as the Fed was then also raising rates, trying to cool the red-hot tech equity market. They did. With a vengeance. Longer-term bond yields dropped during the second half of 2000, and the front end went back to a positive slope. For the most part annualized inflation numbers are coming down – particularly PPI. And we know that producer prices tend to affect the CPI. Our current view is that inflation should subside, and in many sectors it is already doing so.
Muni bonds remain particularly attractive and long bonds even more so. This is because municipal bond funds continue to see outflows – not as vigorous as last June's but still heavy. We have recently started to see 5% yields on some long bonds in muni bond deals. You have to go back to the taper tantrum of 2013 to see that. And at that level it represents a 1.35 yield ratio to treasuries as well as almost an 8% taxable equivalent.
We think that is a heck of a bargain.
Cumberland Comment
Guest columnist
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