Investments such as municipal bonds that have a yield advantage over
Treasuries are likely to be among the fixed income segments that could provide
outperformance in 2014 as US Treasury yields start to move higher.
That analysis is from
the 2014 municipal bond outlook from Standish Mellon Asset Management Company,
the Boston-based fixed income specialist for BNY Mellon. However, one risk to
municipal bond returns in 2014 could be liquidity, which might be strained by
actions of investors, issuers and regulators, the report said.
In 2013, negative
returns precipitated mutual fund redemptions, which led to forced selling by
fund managers, according to the Standish report. The lack of clarity over
federal regulations also limited the willingness of many financial institutions
to commit balance sheet resources to municipal bonds, reducing the depth of the
market's support, Standish said.
Over the long run,
Standish expects to see an increase in municipal bond issuance to help meet the
need for infrastructure investment. That would reverse the low
levels of issuance of the last three years, brought on by austerity programs at
the state and local governments. Standish expects new issues that support
infrastructure will be longer term as infrastructure programs tend to take
several years to complete.
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