Municipals still are attractive at these prices levels, even after the rally that we've seen so far at the onset of 2014. The dramatic sell off that we saw in the summer of 2013 created a lot of value and actually began to pay investors to move out the yield curve, something they weren't getting paid for prior to that big sell off. Now, we've clearly given some of that back, but short-duration bonds, cash are still very expensive both on a relative basis, on an absolute basis.
So we think that there's still a lot of value and a reason for investors to move out the curve, and if you take a look at the rate environment, it's a lot more benign than it was or at least what investors were expecting at the end of 2013, when everyone was calling for rates to move higher. We've actually seen the opposite. Rates have moved lower. Not to say rates won't move higher over the next couple of months as some of the weather-related economic data begins to be filtered back into investor expectation for rates and inflation, but nonetheless, I think the rate environments more benign, giving investors more confidence to move out the curve.
The big focus this year is really on income, something investors forgot about last year. I think they were really examining risk in their portfolios in terms of duration and credit. They felt a lot of pain in the summer sell off, and that, I think, really, was the focus, as opposed to the tax changes that went into effect in 2013. You take a look at the Affordable Care Act, alone, at 3.8 percent, municipals are exempt from that calculation, so that alone, on top of the higher marginal tax rates, adds a lot of value.
So I think the focus is on income. If you look at taxable equivalent yields vis-à-vis treasuries, vis-à-vis corporate bonds, very attractive. I think that's what the focus really should be on this year is how to maximize that income. Probably some caution is warranted, though. We've had a very good rally the first several months of the year, so perhaps we wait for a bit of a backup as this weather-related economic data gets stronger over the next couple of months. That perhaps creates a value to lock in better yields for a longer-term time frame.
Related by Topic: Economic Outlook , Fixed Income
Although last week was a challenging one for investors, we do not believe the sell-off reflects a fundamental shift in market conditions. However, Chief Investment Strategist Russ Koesterich discusses how it points to three important lessons to be mindful of going forward.