Muni Market Update
Municipal bond market performance has been relatively flat during 2015, with intermittent periods of volatility during the year. We believe that much of the volatility throughout 2015 can be attributed to the effect of headlines, rather than to actual credit events. Despite many headlines moving the market over the past five years, the Oppenheimer Rochester municipal bond funds have offered attractive yields and total returns across the board.
Rising Interest Rates
Even if the Federal Reserve Board (Fed) continues to raise short-term interest rates, the effect on long-term interest rates remains speculative. Whether interest rates increase, decrease or remain stable, we will continue to manage the funds in an effort to generate long-term total return driven primarily by income while maintaining each fund’s overall credit and maturity standards.
In 2015, tobacco bonds represented the top-performing municipal bond sector for the second year in a row. While many of our competitors have liquidated tobacco bond positions only to buy back in, we have maintained our positions, which have benefitted shareholders who share our longer term perspective on municipal bond investments.
Volatility in Puerto Rico bonds has related back to market fears of payment defaults, largely due to statements from the Puerto Rican government indicating that it would not be possible to make debt service payments due in January. 95% of bonds payments due in January were, in fact, made as agreed; PFC bonds and PRIFA bonds failed to make payments as scheduled. These defaults were the result of an emergency measure, which Governor Padilla said he authorized, to “claw back” revenue from these authorities and use it to ensure that other debt was paid in full. For the Oppenheimer Rochester funds, $99 million of $107 million owed in debt service payments were received as anticipated on January 1.
Our belief remains that neither restructuring nor bankruptcy protection would benefit the economy of Puerto Rico or its citizens nearly as much as negotiating with bondholders to arrive at a mutually agreeable resolution to debt. We believe that these agreements would help Puerto Rico’s economy in the short term, while benefiting bondholders with more solid credits over the long term.
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Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates, or an expectation of rising interest rates in the near future, will cause the values of a fund’s investments to decline. Risks associated with rising interest rates are heightened given that rates in the U.S. are at, or near, historic lows. When interest rates rise, bond prices fall and a fund’s share price can fall. Municipal bonds are subject to default on income and principal payments. Further, a portion of some funds’ distributions may be taxable and may increase alternative minimum tax (AMT) for investors subject to that tax; distributions from net realized capital gains are taxable as capital gains. The funds invest in below-investment-grade debt securities, which may entail greater credit risks, as described in each fund’s prospectus. These securities (sometimes called “junk bonds”) may be subject to greater price fluctuations and risks of loss of income and principal than investment-grade municipal securities. The funds may invest substantially in municipal securities within a single state or related to similar type projects, which can increase volatility and exposure to regional issues. The funds may also invest substantially in Puerto Rico and other U.S. territories, commonwealths and possessions, and could be exposed to their local political and economic conditions. Deterioration of the Puerto Rican economy could have an adverse impact on Puerto Rican bonds and the performance of the Rochester municipal funds that hold them.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views