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Monday, April 4th, 2011
buying the dip

Fresh on the heels of a new essay on muni blues, it’s time to revisit that fixed income sector and see how it has performed of late.  Using the closed-end fund Nuveen Insured Municipal Opportunity Fund (NIO), the top panel illustrates that its net asset value and market price have not recovered from their fall declines.

However, the middle chart shows how the market price of NIO has rallied back to parity with the NAV.  In February, it even hit its highest level relative to NAV for this entire period.  Not what you’d expect for a sector where there are supposed to be dangers lurking.

In fact, as shown in the bottom panel, munis in general are at the lowest rates relative to Treasuries since last year at this time.  (This particular comparison shows the Bloomberg index of ten-year AA3 general obligation bonds and that of the ten-year Treasury note.)  Therefore, the price decline in NIO since the fall is really a function of Treasury rates moving higher rather than muni-specific problems coming to the fore.

As I said in my essay, a muni is not a muni.  There are many different types of bonds in the sector and financial standards are applied unevenly.  The dip in the sector has been bought (the standard mode of behavior in markets today), but the real test may still be in front of us.  If you don’t have a good muni credit analyst giving you advice, now might be the time to find one.  Most municipal issues will be “money good,” but there will be some surprises along the way, and the performance spread among municipal money managers is likely to be greater than has been historically the case.  (Chart:  Bloomberg terminal.)