Pricing Services; Challenged by Municipal Bonds

Over the course of 2013, there has been significant volatility in the investment grade bond market. Ten-year rates jumped over 150 basis points this summer, fell back 50 bps in September, and have drifted up toward the recent peak of 3% since then.  This volatility impacts the accuracy of the independent pricing services, which rely on trade data and pricing models that incorporate spreads over a given index.  Pricing errors are less common in the US Treasury and corporate debt markets because issuers are more readily comparable and issues more similarly structured.  In the municipal market, pricing is a greater challenge due to the diversity of issuers and marginally lower liquidity, as well as varying issue structures.  Regulators and market participants have grown more wary of the prices on municipal debt because the mark can grossly undervalue or overvalue the bond. This is one area where SNW Asset Management adds value to our clients’ portfolios: we challenge the pricing and negotiate the value of the bond at the time of a purchase or sale transaction.  It is also important to remember that, as a bond approaches maturity and the bond price approaches par, any pricing error will correct itself. Lastly, in times of heightened volatility, it pays to take a longer term perspective focused on relative value when evaluating current holdings and potential trades.