In the 1Q 2018 issue of our quarterly publication, we:
- Explore how variable rate demand notes (VRDNs)—a type of municipal bond—may have the potential to perk up a bland fixed income diet and are an important part of a well-balanced portfolio.
- Look back on municipal bond market performance and supply/demand in 1Q.
- Provide a round-up of yields across the muni spectrum, and an outlook for 2Q, framing it in terms of our broader core narrative.
Variable rate demand notes (VRDNs) have provided some spice within the municipal market over the last 18 months. These notes may have long final maturities, but have tender features that provide either daily or weekly liquidity. While we have written some topical commentaries about VRDNs over that time span, these notes continue to deserve comment. VRDNs have certainly provided some seasoning to an otherwise bland realm of the municipal market.
For multiple reasons, both taxable and tax-exempt short-term fixed income vehicles have moved higher, sparking investor interest. Surely we miss a few, but dating back from mid-2016 through the first quarter of 2018, here are some factors influencing short-term rates: money market reform, Federal Reserve tightening, Federal Reserve balance sheet paring, repatriation of corporate profits abroad, and burgeoning T-bill issuance. In March, Wilmington Trust Investment Management’s investment team authored a blog post on these factors and how they have been pushing LIBOR significantly higher, which directly impacts short-term taxable fixed income.
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