March 25, 2020
During the Vietnam war, the military term “broken arrow” was universal code meaning a ground unit was being overrun by the enemy; an urgent call to send all available assets to help. Now!
Unprecedented liquidations from municipal funds and ETFs last week overran the ability of dealers and traditional investors to manage redemptions. The result was the sharpest one-week decline in municipal bond prices since at least 1981. The technical selling pressure completely overran fundamental valuations. According to Lipper data, municipal funds saw net redemptions of $12.3B, nearly three times the previous outflow record. Over 40% of the redemptions were from high yield municipal funds/ETFs, where credit and liquidity concerns were most acute. But investors sold what they could, which to a large extent was higher-quality, short-term maturities, which then negatively impacted the entire municipal investor base.
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Fixed income is generally considered to be a more conservative investment than stocks, but bonds and other fixed income investments still carry a variety of risk such as interest rate risk, regulatory risk, reinvestment risk, credit risk, inflation risk, call risk, default risk, political risk, tax policy risk and liquidity risk. In a rising interest rate environment, the value of fixed-income securities generally decline and conversely, in a falling interest rate environment, the value of fixed income securities generally increase. Municipal securities investments are not appropriate for all investors, especially those taxed at lower rates.
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