U.S. municipal bonds on solid footing heading into 2016
By Karen Pierog and Hilary Russ
CHICAGO/NEW YORK Dec 23 (Reuters) - Manageable supply, healthy demand and stable credit outlooks should aid U.S. municipal bond performance in 2016 despite the Federal Reserve hiking interest rates, analysts and investors said.
While municipal bonds are ending 2015 on top of the fixed-income heap, some market analysts expect positive but smaller returns next year.
Tax-exempt bonds beat U.S. Treasuries and corporate and mortgage debt on Bank of America Merrill Lynch's master indices, with year-to-date total returns of 3.27 percent as of Dec. 17. Barclays' muni index returns as of Monday of 3.23 percent also outperformed every other U.S. and Canadian fixed-income index.
BofA believes munis can generate about 3.1 percent in returns next year, according to Philip Fischer, a municipal research strategist.
"We think the muni market is in good condition," he said.
Morgan Stanley's forecast calls for more-modest returns of 1.25 percent. However, Barclays' muni analysts project total tax-exempt returns to turn slightly negative at -1.0 percent to -0.5 percent in the coming year.
"Higher Treasury rates, rich valuations and headline risks are set to make 2016 a lackluster year for the municipal market," Barclays said in a Dec. 4 research note.
Last week's Fed rate hike and the promise of fatter yields could entice investors who have been sitting on the sidelines with cash to come back into the muni market. Continuación...