Back in May 2016 I mentiond that high yield munis were overvalued relative to their risk. The correction started in October. While the equity market has rallied, the munis have sold off, especially high yield munis.
Another metric I find interesting is historical drawdown. As you can see below drawdowns of 5% to 8% are fairly common. This includes prior rate hike cycles. We are currently at about 5.5%
So why the melt down in muni bonds? Here is my punch list, most of which are related to the new Trump administration:
- Valuations - They were rich
- Duration - Rates are going up
- Taxes - They are going down, making tax exempt income marginally less attractive
- Infrastructure spending - Will increase the supply of tax exempt debt
- Rumors of tax exemption going away - Are just that, rumors
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