Municipal Fixed Income Commentary 3Q2011

During the third quarter, municipal yield dropped significantly as the Federal Reserve announced “Operation Twist” which drove long dated Treasury yields to their lowest levels since the 1940’s. Cash balances that were building in municipal accounts waiting for investment opportunities were force to put the money to work as yield levels decreased rapidly. Year to date municipal new issuance of approximately $193 billion was down over 35% compared to 2010 issuance. As a result, the Barclays Municipal Index ended the 3rd quarter with a generous total return of 3.81%. In addition to the Fed’s actions, longer-dated municipal bonds outperformed due to supply constraints, lower inflation expectations and a preference for municipal investors to reach for yield.