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2020 was a strong year for municipal bonds, with the municipal market showing resilience after a difficult first quarter. But will that really come to pass? Commentaries. Subscribe to our free daily newsletter, Top Pros' Top Picks, and be among the first wave of investors to see our best stock ideas for the new year. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. On a buy-and-hold basis, investment-grade and high-yield municipal bond returns have been similar. Subscribe to our free daily newsletter, Top Pros' Top Picks. The Bond Buyer National Outlook, taking place March 31, 2021 is your opportunity to gain the information and best practices you need to deal with the challenges facing issuers and the municipal bond market. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. As regulators push to transition away from Libor, sales of Treasuries linked to the successor rate could boost the new benchmark’s credibility and expand nascent markets for related debt and derivatives. For example, the chart below shows how real long-term (10-30 years maturity) Treasury yields have affected bond prices since 1952. This assumes the Fitch projections to be correct and that interest rates will be stable in 2021. By comparing the yields on Treasury Inflation-Protected Securities (TIPS) and on nominal (fixed-coupon) Treasury notes, you can infer how much inflation the bond market is projecting. Longer duration and lower credit quality muni bonds were the better … The tax-exempt municipal market has benefited from strong municipal mutual fund inflows. a[href$="/experts/bruce-stanforth"] { pointer-events: none !important; } Emerging markets is an asset class that deserves a fresh look given strong investment fundamentals, as well as its current potential to deliver attractive risk-adjusted net investment income relative to other sectors of the fixed income market. We expect the economy to gradually improve in 2021, which is supportive for the finances of most municipal bond issuers. Search News. Page 3 of 10 Municipal Market Insight, continued April 7, 2021 RBC Wealth Management withdrew $605 million from municipal … In 2020, the risk of municipal bankruptcies loomed large as local tax revenues fell and Republicans in the federal government showed little inclination to send aid. When this ratio is rising it means that the high-yield muni fund was stronger, and when it was falling it means that the high-yield muni fund was weaker. Now that tax revenues are rebounding in many places (especially California) and Democrats are stronger in Washington, the outlook for municipal debt has improved. Local government revenues are also holding up well and have been buoyed by a surprisingly resilient housing market, which bodes well for property tax collections. As a result of January’s Georgia U.S. Senate runoffs, Democrats enjoy unified control of the legislative agenda, which means fiscal policy should remain supportive of municipal credit. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Fiscal policy is likely to remain supportive of municipal credit in 2021, although we anticipate downgrades for certain issuers acutely affected by the COVID-19 pandemic. If interest rates rise instead of remaining flat, that will likely favor corporate high yield bonds and leveraged loans over investment-grade bonds of similar maturities. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax; a strategy concentrating in a single or limited number of states is subject to greater risk of adverse economic conditions and regulatory changes. That means that during periods such as 2008 or the first quarter of 2020 when everyone was rushing to the exits at the same time, high-yield municipal bond funds fell precipitously. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. While the market should remain relatively stable this year, we are monitoring three themes that could have a significant impact over the longer term. Increased municipal supply would be welcomed by yield-hungry investors but may require a significant concession from all-time low yields. Visit Municipal Bonds at PIMCO, our central hub for muni content and investments. Although this amount could eventually get whittled down, we expect material aid to eventually be delivered. Fitch Ratings currently projects default rates of 3.5% for corporate high-yield bonds and 4.5% for leveraged loans in 2021. For investors, making the distinction between different credits in these sectors will be critical. Outlook 2021; Weekly Newsletter Sign Up. Such meager recoveries are well below historical averages of 40 cents on the dollar for high-yield bonds and 65 cents on the dollar for leveraged loans. MoneyShow’s weekly Virtual Learning Letter showcases a variety of on-demand webcasts and video market commentary by top financial experts covering the hottest financial topics each week. As a result, expect below-average returns in 2021. In fact, earlier in 2020 their projected default rates were more pessimistic. Are these rates sufficient to compensate for the default risk? About Kitco News. The American Rescue Plan Act of 2021, or American Rescue Plan, is a $1.9 trillion economic stimulus packaged designed to help the U.S. economy through the effects of the COVID-19 pandemic. This condition has been historically unfavorable for the performance of bonds. To sustainably reach its inflation target, the Fed must raise inflation expectations – and that likely will require a period of above-target inflation. With most state fiscal years beginning July 1, budgets have gone through multiple last minute revisions. For example, the chart below shows the ratio of the value of investments starting in 1998 in two municipal bond funds whose portfolios have similar average maturities (17 years) and durations (6 years): Invesco High Yield Muni (ABHYX) and Vanguard Long-Term Tax-Exempt (VBMFX). The SEC yield on the Vanguard Total Bond Market Index Fund (VBMFX) is just 1%, similar to the yield on 10-year Treasury notes. How low interest rates are cooling the bond outlook. As a result, expect below-average returns in 2021. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively. In my book, Higher Returns from Safer Investments (Pearson Education, 2010), I recommended the simple technique of using a 6% trailing sell and buy stops to reduce your exposure during major corrections such as occurred in 2008 and 2020 and then to time your re-entry. High-yield corporate and floating rate bonds look reasonably attractive. This assumes the Fitch projections to be correct and that interest rates will be stable in 2021. I do not expect interest rates to fall in 2021. The Barclays U.S. Corporate High-Yield Index the covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. While credit spreads for the highest-quality munis have tightened considerably since April 2020, spreads on lower-rated issues have lagged the recovery in other markets and remain at multiyear wides, which is creating opportunities in lower-rated municipal credits. PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. The municipal bond market is starting 2021 on a strong note amid robust demand, light supply of new issues, and expectations of fiscal relief for … In 2021, the composition of municipal supply could be a key swing factor for high quality muni performance. MoneyShow’s Top 100 Stocks for 2021 The top performing newsletter advisors and analyst are back, and they just released their best stock ideas for 2021. We see opportunities in lower-rated municipal credits, although bottom-up research and liquidity management will be key. While state and local governments will still need to navigate difficult economic conditions in the months to come, municipal credit remains resilient and we believe the municipal market will benefit from vaccine rollouts, economic recovery, and federal policy support. The chart below shows similar information inferred from the performance of ETFs that track TIPS (TIP) and 7-10 year nominal Treasury notes (IEF). We see the biggest negative impact from such a policy change on long-duration, AAA and AA rated securities with little yield or spread to cushion the shock. The Fed's interest rate policies are playing a key role in cooling bond markets in 2021 and beyond. The danger in high-yield municipal bond (and the funds that hold them) is lack of liquidity. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Conversely, rising interest rates have usually accompanied inflation fears, an environment which makes it easier for corporate borrowers to meet their debt obligations and therefore helps support the price of corporate high-yield bonds. All things considered, the municipal bond market had an exceptional 2020. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. In particular, tourism-dependent regions and cities suffering from outmigration – even if only temporarily – will be faced with the difficult choice of cutting services, raising revenues, or relying on additional borrowing. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. As a result, most of the time, high-yield and investment-grade municipal bonds move in similar directions: rising when interest rates fall, and falling with interest rates rise. However, spreads to Treasuries of comparable maturities, although narrower than normal, are well within historical ranges: 3.75% for high-yield corporate bonds and 3.59% for leveraged (below-investment-grade floating rate) loans1. Even with a strong recovery, interest rates are likely to remain low, while inflation should stay below the Fed’s long-term symmetric target of 2%. Get an edge on the markets with our daily trading newsletter, Trading Insights, and receive timely trade ideas covering stocks, options, futures, and more to keep you on the right side of the action. Additionally, fiscal support has included expanded unemployment benefits, which has helped to support tax revenues, while the significant post-spring rally in the equity market bolstered revenue from capital gains taxes. Over the entire 22-year period, the two funds’ returns were about equal (4.9%/year). There are just far more muni bond investors than there are issuers now,” said Matt Fabian, managing director of Municipal Market Analytics. As a result, I believe the most productive strategy for 2021 will be to search for higher yields in the form of credit risk rather than in the form of longer duration. The shrinking supply of tax exempts has provided a tailwind to muni market performance, particularly for high quality tax-exempt munis, which have enjoyed a full recovery to pre-pandemic levels. While our baseline forecast for munis is constructive – particularly for lower-rated municipals – there are a number of risks to our view, and high quality (AAA and AA) munis are no longer cheap relative to U.S. Treasuries or U.S. investment grade corporate debt. In this article I will review the inflation outlook and the historical precedent that suggests our current climate will be unfavorable for investment-grade bonds. Par amount ($ billions) 2020 actual issuance 2021 projected issuance 2021 projected redemptions 2021 actual issuance . For example, the basket of high-yield muni funds we use for clients recently yielded 2.9% (SEC yield), which is free of federal but not most state income taxes. All investments contain risk and may lose value. Learn the Best Money-Making Strategies for the New Economy, Bond Markets Through the Pandemic, the Election, and into 2021, A New Day in Oil: Trading Oil in a World of Peak Demand and Biden Administration. Fitch Withdraws Ratings on Certain U.S. Municipal Bond Maturities. Fitch Ratings - New York - 05 May 2021: Fitch Ratings has withdrawn its ratings for the following bonds due to pre-refunding activity: --Suffolk County Water Authority (NY) water system revenue bonds, series 2014A (pre-refunded maturities only - 864784DY6, 864784DZ3). In our view, even economic recovery will not prevent significant deterioration in sectors that were already facing secular headwinds, including senior living facilities and sales-tax-backed municipals with a strong reliance on brick-and-mortar retail activity. Fiscal fatigue, prolonged economic scarring, or a rapid rise in rates coinciding with a surge in tax-exempt supply could all threaten to overwhelm already thin broker-dealer inventories that intermediate risk transfers. The stock market offers virtually any combination of long-term opportunities for growth and income, as well as short-term investments for trading gains. While this would appear to be a net positive for the municipal market, the effect on municipal demand will likely be modest. Financial issuers in an Index election, the pandemic, and broader economic could. 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