Municipal Fixed Income Commentary 4Q2011

The Municipal market experienced a yield curve twist during the fourth quarter as the belly of the curve rallied and the wings sold off slightly. As yearend approached, investors were anxious to put cash balances to work as supply decreased and municipal credit risk stabilized. Municipal new issuance for 2011 came in at $295 billion which was down almost 32% from 2010 and was the lowest in 10 years. As a result, the Barclays Municipal Index ended the 4th quarter with a modest total return of 2.12%. With the support of Treasuries, the belly of the municipal bond curve outperformed due to supply constraints, lower inflation expectations and a preference for municipal investors to reach for yield. Generic AAA general obligation yields rallied across the 5 to 25 year area of the curve ranging from 3 bps in 25 year maturities and 40 bps in 9 year maturities.