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July 2015

The Barclays Municipal 3-Year Bond Index gained 0.34 percent during the month of July. See complete fund performance here. 

Municipal bonds saw a comeback in July, even in the face of Puerto Rico’s related volatility, ending a three-month performance slump. A rally in the U.S. Treasury market was a key tailwind. Mixed economic data cast doubt on the Federal Reserve’s ability to begin a rate-hiking cycle this fall, and that led to falling rates. Another factor was the emergence of a more favorable supply-demand dynamic. New municipal issuance for July came in at a historically normal pace and in a wide variety of credits and structures, while demand was reasonable. Munis still offer a positive investment case, but headwinds arise as crossover buyers (taxable investors) have more investment choices and the more corporate bond prices cheapen. A continuation of net negative supply should provide a positive backdrop for August.

Some of the risk aversion seen via fund flows was due to developments in Puerto Rico and, to a lesser extent, Illinois (Chicago) and New Jersey. The restructuring process has begun in Puerto Rico, with the Public Finance Corp. paying only $628,000 of its $57.6 million debt service due August 1. Government officials assert the missed payment is not a default since the appropriation of funds is only a moral obligation of the commonwealth. However, market participants and the rating agencies view this as a signal Puerto Rico cannot meet its obligations, with more defaults on the horizon. Furthermore, Puerto Rico announced it has temporarily suspended the monthly deposits of funds for general obligation debt payments. This sets the backdrop for more negative headlines as the local economy continues its decline.

In other news, California’s governor signed a new law securing revenues for general obligation bonds issued by local governments, a move designed to protect bondholders in a bankruptcy proceeding. “Secured” creditors of a bankrupt municipality are to be first in line to recover their money, but California law was previously silent on whether local general obligation bonds benefited from “secured” status. Thus, when this law becomes effective January 1, it will remove that ambiguity.

Given the fund’s greater exposure to shorter maturities, exposure to the longer end of the yield curve was a drag, as the 5-to-7-year portion of the curve outperformed the 1-to-3-year portion.

Past performance does not guarantee future results.

The Barclays 3-Year Municipal Bond Index is a total return benchmark designed for short-term municipal assets. The index includes bonds with a minimum credit rating BAA3, are issued as part of a deal of at least $50 million, have an amount outstanding of at least $5 million and have a maturity of 2 to 4 years.

Net Asset Value
as of 08/26/2015

Global Resources Fund PSPFX $4.73 0.05 Gold and Precious Metals Fund USERX $4.59 -0.09 World Precious Minerals Fund UNWPX $3.81 -0.11 China Region Fund USCOX $7.11 0.19 Emerging Europe Fund EUROX $5.35 0.05 All American Equity Fund GBTFX $26.00 0.82 Holmes Macro Trends Fund MEGAX $19.54 0.56 Near-Term Tax Free Fund NEARX $2.24 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 No Change