5 Reasons Muni Bonds Will Outperform in 2013

2. Municipal to Treasury yield ratio reverts back toward 2008 pre-crisis historical averages

“We’re not there yet, but once the risk premium is taken out we will be. We would recommend investors reduce exposure to securities that possess heightened sensitivity to rates, and hold onto securities that offer incremental yield, especially due to spread duration.”

3. Remain “long” spread duration, but shift to defensive interest rate posture—income will drive return

“This one is a little different for us this year. Despite the low interest rate environment, muni bonds never really experienced them. As a result, we told clients not to worry about interest rate risk duration in the muni space. But now, after three years, we’re seeing interest rate duration getting pricier, and we’re paying attention to those assets that have sensitivity to pricier areas of the market.  Historical averages could be the norm in 2013 based on several factors including: (1) improving municipal fundamentals, (2) increased demand for tax-exempt bonds as a result of higher tax rates, and (3) U.S. Treasury yields losing their flight-to-quality bid. We believe this will allow municipal bonds to perform well on a relative basis.”

4. Advance refunding will accelerate in 2013

“This is a unique phenomenon to the muni market. Municipalities can only refince once because of IRS rules, so when they do, they want the most bang for their buck. We believe that the environment is heading to an advance refunding cycle in A/AA-rated municipal bonds. Issuers with high coupon debt issued in vintage years 2008 and 2009 will likely capitalize on this “one-time” opportunity to lower costs by issuing new debt at a favorable rate and advance refunding their older, more expensive debt.”

5. Health care and airport sectors outperform

“Following up on our insight that the credit cycle has troughed, we feel that the health care and airport sectors are poised to outperform in 2013. For airports in particular, more people flew in 2012 than ever before, and we expect that to continue in 2013. Also, airlines are poised to start making money again.”