The Outlook for January
Opportunistic tax-loss selling, $46 billion in maturities and coupon payments, and constrained supplies in municipal bonds all point to one thing: the January Effect may be a “slam dunk.” This is, perhaps, not all that surprising. As we have seen above, the January Effect for munis has been fairly common.
In this year’s case, tax-loss selling at the end of 2016 will likely augment the imbalance in supply and demand. Investors who have taken advantage of tax-loss selling opportunities at the end of 2016 in our view will need to re-establish new positions with limited supply. This could push asset prices higher: a textbook January Effect.
Municipal bond performance
Traditional and non-traditional investors returned to municipal bonds in December, thereby breaching the 105% mark for municipal-to-Treasury ratios, according to a BlackRock report. Gradually, the ratio came down and is in the 90%-plus range at present. Non-traditional bonds include the taxable municipal bonds, which cater to projects that are not tax exempt.
The Municipal-to-Treasury ratio is an important ratio used to ascertain the popularity of municipal bonds in comparison to Treasury bonds. It’s obtained by comparing the current yield of the municipal bonds to that of Treasury bonds.
The VanEck Vectors AMT-Free Long Municipal Index ETF (MLN) and the SPDR Nuveen Blmbg Barclays Short Term Municipal Bond ETF (SHM) have literally recorded a reversal in their positions as their prices took a dip in November 2016. The VanEck Vectors AMT-Free Long Municipal Index ETF (MLN) and the SPDR Nuveen Blmbg Barclays Short Term Municipal Bond ETF (SHM) had been the best and worst performers until the November election results. The iShares National Muni Bond ETF (MUB) has managed to remain between the others after the dip in prices in November. The losses slowed down beginning in the third week of December.
The iShares 20+ Year Treasury Bond (TLT) and the iShares 1-3 Year Treasury Bond (SHY) reversed their best and worst performing positions after the election results. The iShares 7-10 Year Treasury Bond (IEF) remained between the others after the November dip in prices. The iShares 1-3 Year Treasury Bond (SHY) has remained relatively unchanged compared to the rest in the past one year. The iShares 20+ Year Treasury Bond (TLT) and the iShares 7-10 Year Treasury Bond (IEF) have recorded a slowdown in their losses since December.
Municipal bonds have a lot of potential events to look forward to, ranging from the dismantlement of the Dodd-Frank Act, the moratorium on new regulation, and the appointment of a new SEC chair as Donald Trump assumes office.