Tags: Mousseau | muni | fund | yield

Cumberland Advisors Is Pounding the Table for Muni Bonds

By    |   Thursday, 19 December 2013 06:48 AM

Dire news from Detroit and Puerto Rico has grabbed most of the municipal bond headlines, but the true story is that many municipalities are now in better shape than they were before the financial crisis, according to John Mousseau, executive vice president and director of fixed income at Cumberland Advisors.

Municipal bonds are cheap, cheap, cheap, Mousseau wrote in a market commentary.

"Most municipalities have undergone dramatic belt-tightening in the past five years. But the austerity has paid off. This should mark the 16th consecutive quarter of rising overall municipal receipts," he said.

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"And there has been progress on the pension and other post-employment benefits front, even in states with the biggest problems, like Illinois."

Mousseau noted that while bond yields have gone up in recent months, inflation has been declining — muni yields have risen 1 percent at the same time inflation has come down 1 percent, improving the spread and attractiveness of municipal bonds.

"This is the cheapest that tax-free bonds have been on a real basis in quite some time. Locking in some book yields that are so high relative to current inflation is prudent," he advised.

Mousseau said that cash flows into municipal bond funds are negative, but that the withdrawals have subsided from their levels of June and July, which followed fears of Federal Reserve tapering.

He acknowledged that in the case of Detroit, its population shrank by more than 50 percent in recent decades while its pension-age population of city workers grew ever larger, creating an "unworkable equation" and economic collapse.

In the case of Puerto Rico, he said the outcome of its massive debt and teetering muni bond overhang is "still up in the air."

But the U.S. municipal bond market is much, much larger than Detroit and Puerto Rico alone. All things considered, Mousseau said intermediate and longer-term tax-free munis offer the best value in many years.

"We feel the combination of now-higher interest rates, lower inflation and better overall municipal credit affords investors a very good bargain for the assumed risk."

Sam Diedrich, a fixed income portfolio manager at Pacific Alternative Asset Management Company (PAAMCO), wrote in a contributor column for Forbes that there both negatives and positives to buying munis in 2014.

Diedrich said there is evidence of a positive "January effect" as December tax-loss harvesting in the muni market subsides. But he said if a "great rotation" by investors out of bonds and into other asset classes takes a strong hold next year, that would be a negative.

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Dire news from Detroit and Puerto Rico has grabbed most of the municipal bond headlines, but the true story is that many municipalities are now in better shape than they were before the financial crisis, according to Cumberland Advisors.
Mousseau,muni,fund,yield
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2013-48-19
Thursday, 19 December 2013 06:48 AM
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