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In January, the Near-Term Tax Free Fund (NEARX) rose 0.67 percent, while the benchmark Barclay’s Capital 3-Year Municipal Bond Index rose 0.38 percent. The Barclay’s Municipal Bond Index rose 1.95 percent for the month. Broadly speaking, fixed-income markets rallied and municipals were no exception as the stock market sold off and global economic data flashed some signs of weakness. See complete fund performance here.
U.S. economic data flashed mixed signals in January, with fourth-quarter GDP growing at a very respectable 3.2 percent, but at the same time nonfarm payrolls grew a meager 74,000 in December. The ISM Manufacturing Index was very strong but durable goods orders were much weaker than expected. Housing indicators were generally strong but consumer confidence indicators were weaker. International data exhibited a similar pattern; the key data point in this regard was the weak Flash Purchasing Mangers’ Index (PMI) for China, which indicated that manufacturing activity had stalled. If China were to slow, this would have negative economic repercussions for many emerging markets. Financial markets experienced more volatility in January but this was especially true in emerging market currencies. While much of this sounds like it has little to do with municipal bonds, we are connected now as never before. Money flowed out of equity and emerging markets and found its way to U.S. fixed income, driving down yields across the board. The Federal Reserve continued to taper its quantitative easing (QE) program by an additional $10 billion in January after beginning the wind-down of the program in December. The Fed appears committed to taper unless economic data deteriorates significantly.
In specialty state trading Illinois and California outperformed, while Puerto Rico remained a laggard. As a group, revenue bonds modestly outperformed general obligation credits. Within the revenue universe, hospitals and industrial development-backed bonds outperformed. High yield or “junk” bonds were among the best performers, rising 3.29 percent. Within the investment-grade universe, lower quality outperformed, as AAA-rated credits underperformed BBB-rated bonds by 63 basis points.
Past performance does not guarantee future results.
The Barclays Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market. 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.
The HSBC Flash China Manufacturing PMI is published a week ahead of the final HSBC China PMI every month. It analyzes 85-90 percent of the responses to the Final PMI from purchasing executives in more than 400 small, medium and large manufacturers, both state-owned and private enterprises. The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.