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Muni Mania

David Kotok, the co-founder and chief investment officer of Sarasota, Fla.-headquartered RIA firm Cumberland Advisors (which has dedicated approximately $2.5 billion of its $3 billion in assets to fixed income), thinks the entire Treasury curve will “ratchet higher” over the next 12 to 18 months.

“How much higher? I don’t know. How violently or benignly, I don’t know,” he says. But the Fed is bent on raising short-term rates, he says, and the additional debt it will need to issue to fund a rising deficit will affect intermediate and longer-term rates.

Kotok also anticipates a “shrinkage tantrum”—the term Cumberland Advisors has coined for the chaos that could descend upon financial markets following a pullback in accommodations by the Fed and other central banks. The Fed is starting to shrink its balance sheet in “baby steps” because it doesn’t want to shock the markets, he says, but this shrinkage will accelerate at the same time the Fed will increase the money supply to tackle the deficit.

Kotok is feeling less optimistic about Treasurys and has negligible holdings in high-yield bonds because the 10-year chase to high-yield has driven spreads to a very narrow level. “I’m favoring the municipal turf, taxable and tax-free, not the corporate turf sector, because that’s where the bargains are,” he says.

Cumberland is very selective on individual issuers and has sold down or completely eliminated munis from some troubled states that aren’t addressing budgetary issues. “Illinois is the poster child” for that, says Kotok, along with nearly a dozen other states (including New Jersey, Connecticut and Kentucky). The tax bill will make it harder for these states, he says, because they tend to have higher real estate taxes and higher income taxes.
Read the full article at FA-Magazine