Municipal Fixed Income Commentary 4Q2010

Rounding out 2010, tax-exempt Municipal bonds experienced the worst quarterly performance since the 1st quarter of 1994; however, the Barclays Municipal Index ended the year in positive territory with a 2.38% return. Generic AAA general obligation yields rose across the yield curve ranging from 15 bps for 2 year maturities to a high of 110 bps for 18 to 22 year maturities. Riskier sectors and lower rated issuers realized even larger yield adjustments as credit spreads widened across the credit curve. During the 4th quarter, market factors such as increased municipal supply coupled with net cash outflows from municipal mutual funds, the uncertainty surrounding the continuation of the Build America Bond (BABs) program and a significant increase in negative headline risk related to municipal credits contributed to the selloff.