The deafening roar has subsided

August 6, 2013

The recent sell-off in fixed income markets, led by the decline in U.S. Treasuries, was big by historical standards. Here the Federal Reserve Bank of New York compares past Treasury bond sell-offs with the most recent one. The recent rout was much deeper and more sustained than most in history.

If we drill down a little deeper into muniland, we see some interesting patterns. Using index data from Standard & Poor’s and Morningstar we can see how July and year-to-date losses compare for various classes and maturities of bonds:

Treasury bonds were hardest hit this year-to-date. Long-dated Treasury bonds had a loss of over 7 percent for the year. Short muni bonds squeaked out a small gain, while long munis suffered. Long corporate bonds fared slightly better.

In muniland, general obligation bonds fared better on a monthly and year-to-date basis. This likely reflects the stronger backing of general obligation bonds, which have tax-raising covenants, over revenue bonds, which usually have only a claim of the revenues that flow through the projects that are funded.

State general obligation bonds are generally more liquid and more sought after than local (city or county) general obligation bonds. You can see this in their relative performance:

July was a difficult month for fixed income. It’s hard to know how much of the losses are related to investors selling because of uncertainty over Federal Reserve tapering or signs of a slowing economy. Detroit’s bankruptcy may have been a tailwind for the low interest rate ship sailing out of muniland harbor. Which way does the wind blow? Stay tuned.

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