Fixed Income Perspectives: Outperformance Redux?

Throughout 2015, investors dealt with increasing volatility and principal declines in riskier segments of the market; however, holders of municipal bonds were rewarded with positive returns and tremendous liquidity. To everyone’s surprise, municipal bonds were the top performing asset class during 2015 with a modest total return of 3.30% for the Barclays Municipal Index. A declining yield environment, investor demand exceeding supply, and a favorable credit environment contributed to positive price returns and stable tax-free income generation. Aside from several high profile credits, Illinois and Puerto Rico to name a few, the municipal market remained stable and boring, as one should expect. Despite less attractive valuations heading into 2016, the majority of the municipal bond market remains poised for another year of modest positive returns and minimal volatility.