Weekly MainStay Muni Monitor

Wednesday, April 23, 2014

Muni Thoughts for the Week Ending April 17, 2014:

  • Long-end muni yields were unchanged last week, while the front end saw yields rally by ~6 bps in 10 years amid muted trading. Despite the sell-off in Treasurys on Thursday related to the apparent easing of Ukraine tension, munis were stable. New issue supply was light for the holiday shortened workweek with bond markets wrapping up trading early Thursday afternoon.
  • Municipal high-yield fund flows continued to dominate the overall share of fund inflows into the municipal market, recording $299 million in inflows for the week and over $2.6 billion year-to-date. The robust demand for high-yield munis, coupled with limited supply, is serving to validate our fourth insight that we believe lower investment-grade and high-yield municipal credits will outperform this year.
  • Fund flows have recently turned positive and looking back historically, fund flows have had a strong impact on the level of municipal yields. The following chart shows the relationship between yields and fund flows' four-week moving average since 2009. While flows were negative towards the latter half of 2013, if the momentum remains positive, we believe they should provide technical support to the market.

    Muni Net SUpply

Credit Ratings: AAA credit ratings apply to the underlying debt securities and are rated by an independent rating agency, such as Standard & Poor's (S&P), Moody's, and/or Fitch. S&P rates borrowers on a scale from AAA to D. AAA through BBB represent investment grade, while BB through D represent non-investment grade. Moody's rates borrowers on a scale from Aaa through C. Aaa through Baa3 represent investment grade, while Ba1 through C represent non-investment grade. Fitch rates borrowers on a scale from AAA through D. AAA through BBB represent investment grade, while BB through D represent non-investment grade. 

The Barclays Municipal Bond Index is a market value weighted index of investment-grade municipal bonds with maturities of one year or more. 

The Barclays Municipal High Yield Bond Index is an unmanaged index of municipal bonds rated below BBB/Baa. 

A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes, and the yield of a fixed-income security.

Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year, and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

Past performance is no guarantee of future results. It is not possible to invest in an index.

A portion of the Fund's income may be subject to state and local taxes or the alternative minimum tax. Treasurys are secured by their full faith and credit. Income from Treasury securities is exempt from state and local taxes.

All mutual funds are subject to market risk and will fluctuate in value.

This material contains the opinions of the MacKay Municipal Managers™ Team of MacKay Shields LLC, but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only, and is not intended to constitute the giving of advice or the making of a recommendation. The investments or strategies presented are not appropriate for every investor, and do not take into account the investment objectives or financial needs of particular investors. An investor should review with its financial advisors the terms and conditions and risks involved with specific products or services, and consider this information in the context of its personal risk tolerance and investment goals. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Any forward looking statements speak only as of the date they are made, and MacKay Shields LLC assumes no duty and does not undertake to update forward looking statements. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.

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