11/14/2022 0 Comments Muni bond defaults 2020![]() This rangebound yield environment is not a recipe for great fixed income performance but is still a much better environment than that faced in the first half of 2022 when yields only seems to move in one direction – higher.Ģ) Net supply. Federal Reserve too hawkish) could continue to push yields higher, counteracting that are recessionary fears, which should act to push yields down. So, while fears of inflation being too hot (and the U.S. Logically, this makes a lot of sense – markets are being forced to choose between elevated inflation and stalling growth. 6 Yields are more broadly expected to remain within a range. 5 While both are still expected to rise between now and the end of September, yields are then expected to return to current levels by the second quarter of 2023. For example, the consensus expectation for the year-end rate on the 10-year has only risen 13 bps. 4 Notably, however, the estimates for 10-year and 30-year U.S. The year-end 2022 consensus expectation for the two-year treasury yield has risen 30 bps since mid-July, from 3.11% to 3.41% as of August 8. 3 We think that conclusion is premature – we are still two Consumer Price Index reports away from the September Federal Open Markets Committee meeting. After another rock-solid payrolls report last week, most rate analysts moved to bake in another 75 basis point (bp) rate hike in September. However, going forward we expect three factors to support improved muni bond performance:ġ) U.S. Treasury yields surged and credit spreads to IG munis widened. The investment grade (IG) muni index is down 6.6% year-to-date, while high yield munis are down 8.5% (See Exhibit 1). Like most fixed income investments (and equities), municipal bonds had a tough start to the year. Three factors should be more favorable for municipal bonds In this week’s commentary, we discuss why lower future rate hike expectations, favorable net supply dynamics, and the likely return of fund flows into the muni space mean we see any weakness as an opportunity to add to municipal bonds exposure over the coming quarter. One area of the fixed income markets that warrants attention right now is municipal bonds, or “munis”. And with the major correction in most parts of the fixed income markets, the entry levels are now a lot better than at the start of the year. Fortunately, as we wrote back in May, there are many ways for investors to earn a respectable income stream. One of the more compelling ideas for investors this year, in our view, has been the idea that you can get paid while waiting for the equity markets to find their footing and volatility to subside. See: Municipal-bond inflows are smashing records in 2021Īll this suggests that the defaults in certain sectors may point to “failing business models,” MMA notes – because access to capital clearly isn’t a problem.Īnd with the Federal Reserve likely getting ready to start tightening monetary policy in the coming months, credit conditions will likely only tighten.After re-pricing downward during a tough start to 2022, we see lower rate hike expectations, favorable supply dynamics, and expected fund inflows as creating an attractive opportunity to increase allocations to municipal bonds, an asset class offering attractive yields. “This is another concerning takeaway: an apparent lack of material progress in restructuring/resolving the tide of broken financings created by the pandemic, despite the most aggressive, most borrower-friendly high yield lending conditions these entities are likely to experience.”ĭemand for municipal bonds, including those considered “high yield,” also sometimes called “junk bonds,” has been so strong, and supply so low, that some funds have closed to new investors, as previously reported. “If IDBs are removed from the calculation, the adjusted current default rate trend is not only smoother but also more concerning, tacking steadily higher since 4Q18,” MMA analysts write. ![]()
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