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So far, 2008 has been a volatile
year for the municipal bond market. I would like to explain
some of the events that have taken place and discuss how we
have approached the management of your municipal bond
portfolios.
Of course, market dislocations
like we have seen over the past few months are unpleasant.
They do, however, present us with some attractive buying
opportunities, which we have sought to pursue where
appropriate.
A confluence of factors caused a
dramatic downturn in pricing throughout the entire yield
curve.
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The
pricing of bonds in the ordinarily sleepy, municipal
bond market suffered tremendous pressure due to
rating downgrades of the bond insurers. As a rule,
we do not depend on the credit rating supplied by
insurers to judge the credit worthiness of a bond.
We “look through” the insurer to the underlying
credit of the issuer. The market, however, decided
to mark down the prices of almost all insured, fixed
income instruments regardless of the underlying
credit quality.
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Brokers and dealers,
already facing liquidity issues, made the
determination that they would no longer commit their
own capital as a “back stop” to the auction rate
market. The number of failed auctions increased
dramatically, further destabilizing pricing in other
parts of the municipal market.
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Municipal bonds, which
were trading at historically attractive levels when
compared to Treasuries, had few buyers, as investors
continued to shun the lower absolute rates of
return.
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Finally, a large
divergence in pricing between Treasury and municipal
bonds forced margin calls at two very large,
municipal bond hedge funds. To reduce their leverage
and meet the calls, these two hedge funds had to
liquidate over $7 billion of municipal bonds during
the course of two days -- February 29, 2008 and
March 3, 2008. |
The last day of February was just
about the low point for the municipal bond market. It is
also the day we price securities for February statements. We
employ an independent source to capture prices for client
statements. For clients who monitor their account on
WebView (our
on-line account monitoring tool), you will notice that
pricing does not change intra-month on municipal bonds. The
price downturn was short-lived, and the first three weeks of
March exhibited a strong bond rally as yields have begun to
normalize.
It is important to note that any
decrease in values in your portfolio constitutes an
unrealized loss. In other words, if your bonds are held to
maturity, the principal should be returned in full. We did
not sell into this unusually weak market. Instead, we were
proactive during the two days of market dislocation to add
bonds to client portfolios at attractive levels.
March statements should show
pricing that has recovered substantially, approaching the
levels seen on January 31, 2008.
If you have any
questions about the Fixed Income portion of your portfolio,
please do not hesitate to call me at 215.419.6027 or email
me at
laura.larosa@glenmede.com.
Sincerely,
Laura LaRosa Armstrong
Fixed Income Portfolio Manager, Glenmede |