Monday, July 29, 2013

Collapsing demand for municipal bonds

For three of the last four days there have been a plethora of new 52-week lows on the NYSE.  This disturbing increase of internal selling pressure comes at a time when a cluster of important weekly Kress cycles are simultaneously peaking and bottoming.  It also comes during the height of earnings season when stocks are vulnerable to headline disappointments.  Added to these obstacles is a still-rising interest rate trend which could add even more pressure to a market somewhat vulnerable to earnings volatility.

Most of the new lows were municipal bond funds.  While these bond funds have little to do with the broad market, it has long been my observation that the new highs/new lows are quantitative, not qualitative.  In other words, it doesn’t matter which kinds of stocks and funds are making new highs and lows; the quantity of stocks making new highs and lows is what counts.  So with a potentially dangerous number of new 52-week lows, there is every reason to be cautious in the next few days as the cycles remain in flux.

The Treasury Yield Index (TNX) bounced off its 30-day moving average last week and has been on the upswing for the past three days.  This reflects rising longer-term interest rates and is adding pressure to the municipal bond sell-off now underway.  It’s amazing when you consider just how many financial commentators and analysts were advising investors to purchase muni bonds and bond funds earlier this year.  This is even more amazing given the downward trend in the average municipal bond fund since last December.  The chart of the BlackRock MuniYIeld Quality Investment Fund (MFT) gives you some idea of the condition the muni bond fund market has been in for the last several months.

Municipal bonds were actually touted as “safe” investments for much of this year and even now, with investors heading for the exits, many analysts are advising investors to stand pat under the assumption that the sell-off was only "temporary."  Whether or not that’s true remains to be seen; what’s clear to be seen already is that rate-sensitive investments aren’t “safe” in a global economy made volatile by the crossing currents of the long-term Kress cycles (deflationary) and central bank intervention (inflation).  [Excerpted from the 7/24/13 issue of MSR]