Copyright 2014 Arbor Research & Trading, LLC. All rights reserved.

This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in
any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

Munis flyin high but may be over their skis

The Barclays Municipal Bond Index has produced a YTD gain
through October of +8.3%, which almost doubles high yield
corporate debt at +4.2%.
1
Munis have seen ten consecutive
months of gains even as US high yield, MBS, and the S&P 500
encountered bumps in the road due to rate hike talk. Munis
took the reins from US high yield this August in our list as
the top risk-adjusted performer according to rolling 60-day
reward-to-risk ratios. However munis relative performance
reached a crescendo on October 15
th
to the following total
return indices:
Barclays Aggregate Bond Index
Barclays MBS Index
iBoxx $ High Yield Index
S&P 500
DJ Commodities Index






We review spreads between the Barclays
Municipal Bond Index and key benchmarks
reward-to-risk ratios. Many of these spreads
are nearly as high as they have been since
2000. Next we calculate percentiles for each
spread to gauge overbought/oversold
conditions. The average of these percentiles
just recently exceeded its 95
th
percentile.

1
iBoxx $ High Yield
11/3/2014
Quick Read Ten consecutive months of strong risk-adjusted returns are shining a spot-light on munis, however extreme
relative performance to other asset classes is of concern.
Copyright 2014 Arbor Research & Trading, LLC. All rights reserved. This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in
any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

Interestingly, drops by this average percentile below 90%

have been followed by relative muni underperformance.
Since 2001 the muni index has underperformed 60 days
later the Aggregate Bond Index and S&P 500 in 4 of 6
instances (67%) and High Yield in 5 of 6 (83%) instances.

Below are signal dates:
September 20
th
, 2001
October 16
th
, 2009
March 8
th
, 2010
October 6
th
, 2010
August 24
th
, 2011
February 14
th
, 2012
This percentile fell below 90% on October 24
th
, 2014.


Please see below for a history of signals expecting relative underperformance by the Barclays Municipal
Bond Index: