Who would have guessed that municipal bonds, which struggled mightily in 2013 amid Detroit's bankruptcy and financial turmoil in Puerto Rico, would emerge as investors' darlings in 2014?
The Barclays Municipal Bond index has returned 8.71 percent this year, easily topping the 4.6 percent for the Barclays Treasury index, 7 percent for investment-grade corporate bonds and 2.4 percent for the Corporate High Yield index.
"The U.S. muni market lurches between extended periods of tranquility and abrupt interludes of instability," Thomas McLoughlin, co-head of fundamental research at UBS Wealth Management, told
The Wall Street Journal.
"And the story of 2014 is this has been an extended period of relative tranquility."
Cities and states have curbed their borrowing and raised taxes to improve their finances.
"I think people are understanding that there's not going to be a rash of bankruptcies in the market," Ashton Goodfield, co-head of the municipal-bond department at Deutsche Asset & Wealth Management, noted. "It's a confirmation that municipal credits are generally solid."
Even with the Federal Reserve expected to begin raising interest rates around mid-2015, munis look attractive, Daniel Solender, director of municipal-bond management at Lord Abbett, told The Journal.
"There are still more bonds being called out of the market than being issued, so that creates some demand," he said.
But muni legend Alexandra Lebenthal, CEO of Lebenthal Holdings, counsels caution for next year. "The impulse to project current results into the future should be tempered," she wrote in a commentary for
CNBC.
"On the credit front, . . . [outside of Detroit and Puerto Rico,] as long as the overall economic performance in the U.S. continues to trend positively, expect credit performance to be within historical norms while those identified problem spots continue to bear watching."