Will Municipal Bonds March Lower?

Believe it or not, March is nearly upon us. This is positive news for those looking forward to melting snow and warmer temperatures, but it’s less exciting for municipal bond investors as March has historically been a difficult month for the municipal bond market, as the chart below shows. What are the causes of March weakness, and can we expect a similar situation this year?

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There are several reasons for this weakness, first of which is a difficult seasonal period for the broader bond market. Moves in Treasury markets tend to drive other fixed income sectors, and this time of year usually sees a seasonal increase in Treasury issuance ahead of tax refund season. We see no reason that this year should be different than past years in this respect.

A second factor is supply in the municipal market itself. Municipal supply tends to wind down toward the end of the year, and stay below average in January and February before ramping up in March. December of 2016 saw higher-than-average volume as municipalities pushed to get deals priced ahead of the Federal Reserve’s well-telegraphed December rate hike, but since that time, supply has contracted as expected although it is likely that supply will pick up as we head toward March.

A final factor is tax-related selling. Investors often need to sell assets in order to pay tax bills and the municipal pullback in the fourth quarter of 2016 means that many investors may have unrealized losses,  making the asset class a more attractive sale candidate.

While history is not a guarantee of the future path of markets, it seems that all of the factors are falling into place for another weak March for municipal bonds.  We will continue to monitor developments and share our observations on the LPL Research blog.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Federally tax free but other state and local taxes may apply.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

The Bloomberg Barclays U.S. Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.

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