Markets

Emerging Markets Led Taxable Funds In May; Munis Up Too

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Taxable bond investors of all stripes scored gains in May.

Investors most focused on yield crowded into emerging markets debt funds. Hard-currency funds, typically issued in U.S. dollars, led the way, rising 2.83% on average in May, according to preliminary Lipper Inc. data.

Emerging markets local currency funds were close behind, up 2.07%.

In addition, Treasuries as well as U.S. spread products gained in May.

U.S. Treasury funds rose 1.72% as 10- and 30-year Treasury yields declined.

Treasury prices were pushed up largely by global investors who saw more value there than in non-U.S. sovereigns, said Charles Burge, senior manager of $638.4 million Invesco Core Plus Bond Fund .

Burge held a 30-year Treasury with a 3.625% coupon whose price rose in May 2.98 to 106.09.

"Globally, yields in the U.S. looked attractive vs. other developed markets like Germany, France and Switzerland," he said.

Emerging markets local currency funds were rebounding from a tepid first quarter, Burge said. "People saw opportunity there, so that market performed decently," he added.

Triple-B-rated corporate bond funds were not far behind Treasuries, tacking on 1.44%.

After losing ground last year, both triple-B-rated and A-rated corporates are up 5.61% and 5.41%, respectively, this year. They lagged Treasuries in May because they began to look slightly expensive.

"Investors think they've run up a lot this year," Burge said.

Summer Break

Burge expects taxables to take their traditional summer breather. After that, he sees prices for non-Treasury taxables outperforming Treasuries as post-summer trading picks up and as spread products respond to the economic recovery.

The segments he likes most now include emerging markets, BBB-rated corporates and commercial mortgage-backed securities.

Treasury prices could start to slip later this year as the Federal Reserve's quantitative easing program winds down and the fed funds rate stays where it is for the next year or so, he said.

The yield curve flattened as the yield on two-year notes edged down about 5 basis points to 0.37%, while the yield on 10-year notes fell 19 points to 2.48%.

Muni Moves

Tax-exempts generally had a solid month, rising an average of 1.34% in May.

After getting clobbered last year, municipal bond funds are up 5.80% this year.

They traded off in March due to investor concerns about Detroit's bankruptcy and Puerto Rico's finances. But they've rallied since then.

It is still not clear how badly bondholders will be hurt by Detroit in comparison to city pensioners.

At least some debt for which voters previously approved backing by specific revenue sources appears poised to do better than debt with limited backing and no voter approval, he said.

"All G.O. debt is not equal," he said, referring to general obligation bonds. "It's still too early to say how it will play out."

And that city's woes have not infected the overall muni market, said Konstantine Mallas, manager of five T. Rowe Price funds, including the $2.5 billion Tax-Free Income Fund .

Also, investors who did not want to remain exposed to Puerto Rico have trimmed or sold the commonwealth's debt, he added.

Most important, perhaps, demand rose slightly in May, while supply remained constrained, he said. Austerity pressures prevented many jurisdictions from issuing new debt. And rates have not fallen enough to fuel much refinancing.

Mallas' outlook is bullish. "We're not seeing a significant change in issuance, so technicals continue to bode well for munis," he said.

Demand traditionally climbs in June and July as many investors reinvest coupon payments.

After that, he expects a slowdown.

"It would be rather challenging to see (a repetition of May's) 1% type returns each month moving forward," he said. "Most investors would be happy to end the year with the gains we've seen so far."

Mallas held a California general obligation bond that matures Nov. 1, 2043, is rated A by S&P, and whose total return for May was 2.35%. It showed investor appetite for long munis. The Barclays muni bond index gained 1.29%. The index's long munis -- 22 years and longer -- averaged 2.2%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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