Municipal strategists say intermediate securities, premium bonds with short calls, and investment-grade paper top their holiday wish lists of must-have securities as 2014 winds down, while they forecast continued steady performance by municipals into early 2015.
At least one analyst said he recommends safety over credit risk, while others are generally positioning for low interest rates in the near-term and steady to improving volume and performance in the first quarter of the New Year.
Tom DeMarco, a market strategist at Fidelity Capital Markets, favors the value in the belly of the curve - at 10 years - versus the five-year and 30-year maturities.
"The market is cheaper from where it was back in October," he told The Bond Buyer on Tuesday. "We're about fair value versus Treasuries from the 10-year on out."
"The steepness of the 2-year and 10-year curve gives the belly a superior value proposition compared to a combination of shorter and longer bonds," DeMarco wrote in a Nov. 7 municipal report.
While the report said the front end saw some cheapening in October that was the result of "extreme levels" to start the month, he said in an interview on Tuesday that the front end "still looks a little rich."
In terms of coupon structure, DeMarco prefers 4% versus 5% as they have become slightly more attractive compared to earlier this month when he felt the differential between the two was "unimpressive."
The 4% coupon bonds have become cheaper by three basis points as of Monday, he said.
Overall, he said the 10-year triple-A municipal to Treasury ratio of roughly 95% as of Tuesday was still considered relatively attractive.
In addition, DeMarco favors the investment-grade sector of the municipal market and focuses on quality, duration, and structure.
"Spreads look tight to me in most sectors, and even though high-yield and lower-quality has outperformed, up in quality is probably the way to be," he said on Tuesday.
DeMarco counts housing bonds, kicker bonds with short calls, and long taxable munis among other attractive options.
Others, like Jeffrey Lipton, head of municipal research at Oppenheimer & Co., are also partial to premium bonds for their higher cash flow, and stated interest-rate that is greater than currently available market rates.
"The additional tax-free income compensates for a higher purchase price," Lipton wrote in a municipal market report on Monday. He said premium bonds are especially appealing in today's climate given the expectations for higher interest rates.
"Premium bonds do not perform well in an appreciating market, but rather cushion adverse price performance in declining markets because of their bigger coupons," Lipton wrote.
In addition, premium bonds also can provide less secondary market price volatility and frequently offer higher yield-to-maturity and yield-to-call than similar maturity bonds priced at discounts or close to par, Lipton said.
Meanwhile, analysts said they expect municipals to continue to behave as well as they did in 2014 - if a supply-demand imbalance continues to drive strong performance into the first quarter of 2015.
"The tailwinds are still very positive for muni bonds," Jim Colby, chief municipal strategist at Van Eck Global, said in a video update posted earlier this month on the firm's website.
He said the Fed outlook on interest rates is expected to remain low for the foreseeable future, which should help support volume.
"Demand for munis created by coupon, maturity, and bond call reinvestment has completed overwhelmed the supply of new issuance in the muni market place," Colby said in the video interview.
Other analysts are divided on how ebbs and flow in volume will affect the market, but agree that demand is healthy..
DeMarco of Fidelity said a repeat of a recent supply bulge could "keep a little pressure on the market in the near term."
But he noted that volume estimates of $10 billion-a-week forecasted for early December should be manageable overall.
"From a broader perspective, the supply-demand situation still looks favorable for market conditions - if you can look past these occasional spikes," he told The Bond Buyer on Tuesday. "Over the next three months net supply is probably going to be moderately negative," he said.
"November may break the winning streak as mounting supply has altered the technical landscape," Lipton wrote in his report.
John Miller, co-head of fixed income at Nuveen Asset Management, said in a Nov. 24 weekly fixed income report, that a combined December 1 coupon and maturity reinvestment totaling $28 billion will provide additional strong technical support to the municipal market as 2014 comes to a close.
Colby, however, maintained: "there is little in the way of an uptick in terms of new issuance to upset this particular imbalance."
October's volume of $34 billion came in 17.7% higher than a year earlier, the third month in a row issuance was greater than at the same time in 2013, according to Thomson Reuter's data.
The uptick was fueled by a 67.4% surge to $12.34 billion in refunding volume from $7.4 billion in the same month last year as issuers took advantage of low interest rates, analysts have said.
With November volume edging up, "buyers are able to be more discerning, yet new deals are still being underwritten with enthusiastic placement," Lipton said. Volume increased 15.3% from a year earlier in November, according to Thomson Reuters figures released Wednesday.
Meanwhile, strong technicals, low rates, positive fund-flows, and favorable tax treatment for the asset class have produced a 9% return year-to-date, Lipton noted.
October marked the 10th consecutive month of gains for the municipal bond market, noted BlackRock Inc.'s team of Peter Hayes, head of the municipal bonds group, James Schwartz, head of municipal credit research, and Sean Carney, municipal strategist, in a November municipal report.
"Although a positive month, it was a volatile one -- a trend that is likely to continue as the Fed and interest rate policy attracts greater attention," the BlackRock analysts added.
Higher relative value ratios have reflected the cheapening of municipals relative to Treasuries, Lipton noted, but he expects the 10- and 30-year triple-A benchmark ratios of 92% and 101%, as of Monday respectively, to increase.
"Through the balance of the year and into early 2015, even more attractive entry points may become available, which would reasonably lead to expanded cross-over buyer interest," Lipton said in his report.
"Institutional window dressing ahead of year-end, which generally entails some degree of portfolio realignment to harvest gains, as well as duration shortening in anticipation of rising interest rates, may also present better price points and bond selection for the opportunistic investor."
Colby of Van Eck added: "The latent demand, coupled with the low-rate environment and the boost that munis receive from the December-January roll, continues to make municipals a very attractive asset class."
