Special Commentary: Measuring the Summer Cash Flow Impact in the Muni Market
By Chris Mier on July 26th, 2011
Summertime for most people might mean picnics and volleyball games, but for muni market participants it means the annual focus on June and July coupon (and other) cash flows and their impact on the market. We analyze the summer cash flow phenomenon to determine if the statistical impact is large enough to be discernable by the statistical eye.
We have just past through the annual rite of the summer cash flow reinvestment in municipals. Owing to the propensity of issuers to sell bonds with June and July coupon and maturity dates, this annual event has been a summer attraction for many years. The cash comes in and holders of muni bonds reinvest, at times somewhat nervously. Dealers and opportunistic sellers lie in wait; trying to profit as the muni reinvestment dollars find their way back into muni bonds. To the muni veteran, it is all very familiar, but is it a measurable phenomenon grounded in reality or is there some municipal mythology involved? Just how big is the impact in units we can relate to--basis points? We apply multiple regression to the task and provide a quantified result.
We have just past through the annual rite of the summer cash flow reinvestment in municipals. Owing to the propensity of issuers to sell bonds with June and July coupon and maturity dates, this annual event has been a summer attraction for many years. The cash comes in and holders of muni bonds reinvest, at times somewhat nervously. Dealers and opportunistic sellers lie in wait; trying to profit as the muni reinvestment dollars find their way back into muni bonds. To the muni veteran, it is all very familiar, but is it a measurable phenomenon grounded in reality or is there some municipal mythology involved? Just how big is the impact in units we can relate to--basis points? We apply multiple regression to the task and provide a quantified result.
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