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In October, the Barclays Municipal Bond Index rose 0.79 percent. Broadly speaking, fixed-income markets rallied as the Federal Reserve delayed tapering its quantitative easing program that was expected in September. The five-year portion of the curve was the best performer, followed by the long end of the curve.
The U.S. economy remained stuck in low gear and the government shutdown in early October didn’t help. Better economic data continued to come out of both Europe and China and expectations have been building for a more robust global economy in 2014. Japan remains committed to an aggressive monetary policy that also provides a tailwind for global economic growth. The Fed is struggling with the prospects to reduce the quantitative easing program while the economy remains weak. This talk of tapering has been the primary driver behind the bond market selloff which started in May along with improving global economic data. Bonds have rallied since early September on the prospects of easing monetary policies continuing unabated. The Fed implemented a $40 billion-a-month quantitative easing program in September 2012 and followed that up with an additional $45 billion quantitative easing program in December 2012 to replace the expiring “operation twist.” The Fed is currently buying $85 billion a month in treasuries and mortgage backed securities in an attempt to boost the economy.
In specialty state trading California and Puerto Rico outperformed, while Illinois lagged. As a group, revenue bonds modestly underperformed general obligation credits. Within the revenue universe, housing related issues were the negative outlier, while industrial development backed bonds outperformed. High yield or “junk” bonds lagged, rising 0.65 percent. Within the investment grade universe, quality generally outperformed, as AAA-rated credits outperformed BBB-rated bonds by 351 basis points.
Past performance does not guarantee future results.
The Barclays Capital Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.