We strive to provide the highest level of client satisfaction, and handle each request with the utmost importance. We expect to respond to each request we receive within one business day of receipt.
Please note that trades cannot be processed via e-mail for security reasons. If your inquiry requires immediate assistance, please call us at
1-800-821-5129 (8:30 a.m.-6:00 p.m. EST, Mon-Fri).
Thank you for contacting Lord Abbett. A member of our staff will contact you between X:XXpm EST and XX:XXpm EST [today OR XX/XX/XXXX]. A confirmation has been sent to your email address.Close
Use this form to give us your feedback or report any problems you experienced finding information on our Website.
* Indicates Required Fields
Thank you for providing feedback.
After a rewarding year for many municipal bond investors in 2012, there is some uncertainty about what 2013 may have in store. Therefore, some perspective on relative value trends, recent market developments, and particular issues that might affect the asset class could help investors identify this year's potential investment opportunities.
1) Proper Perspective for Relative Value
Although 2012's strong market performance resulted in a flatter yield curve and tighter credit spreads by the end of the year, these metrics should be viewed from a longer-term perspective. This is because the capital markets have been in an unprecedented environment during the economic recovery, and investors evaluating the market in the context of only the past five years could miss further opportunities.
For example, one of the most visible signs of the Federal Reserve's policy accommodation has been the steepness of the yield curve relative to its historical levels. Despite last year's significant outperformance of the longer-term portion of the market, the municipal yield curve stood at about 280 basis points (bps) to start 2013. This was still 10 bps steeper than the long-term average.1 Yet the recent level appears even steeper when considering that it was less than 50 bps in early 2007, which was before the Fed started its aggressive policy accommodation. The portion of the curve consisting of 10- to 30-year maturities is even steeper compared with historical averages.
Similarly, the extreme market dislocation of 2008 left credit spreads extraordinarily wide. And even after tightening last year, the yield spread of 'BBB' rated muni bonds to the yields on 'AAA' rated muni bonds was 220 bps at the end of 2012, 96 bps wider than the long-term average2 (see Chart 1). Also, the spread of high-yield muni bonds over investment-grade munis was 350 bps at the end of last year, 73 bps wider than the long-term average.3
Past performance is no guarantee of future results.
Indexes are unmanaged, do not reflect the reduction of fees or expenses, and are not available for direct investment.
This year also started with benchmark municipal yields that were below those on Treasury rates, which is a notable difference compared with the past couple of years, when the tax benefit on municipal bonds was essentially discounted. In examining relative value, it could be overlooked that before 2008, it was an extremely rare occurrence for municipal yields to exceed those on similarly dated Treasury securities. Therefore, having lower municipal benchmark yields compared with Treasuries to start 2013 is really just a reversion to the long-term tendency and may be a more accurate reflection of the historical value that investors have placed on munis' tax benefits.
It is also important to recognize that the yield comparison above is based on benchmark municipal indexes. And almost all municipal bonds trade at yields that are higher than the benchmarks, meaning their yields may still be higher than those on similarly dated Treasuries.
2) Watch for Headlines
The outcome of Washington's ongoing fiscal drama has broad implications, and the municipal bond market continues to be directly affected. While the recent tax package could be considered largely positive for the municipal bond market, there are other fiscal issues that will require negotiation and may not have a similar outcome. (See consideration 5 for additional ramifications of the American Taxpayer Relief Act of 2012.)
Indeed, if one now views the "fiscal cliff" as consisting of two parts—the first regarding revenues and the other regarding spending—then it was a significant positive that the recent tax package did not include a previously suggested 28% cap on the exemption for municipal bond income. Given the unpredictability of Washington, however, this is an issue that could resurface, and new headlines about an exemption cap could negatively affect the market.
Also, although the delay in the spending side of the fiscal cliff was positive, the rhetoric about spending cuts will intensify as March approaches, which is when the spending cuts previously agreed upon are scheduled to occur. If spending cuts are enacted, they will need to be examined for their potential effect on municipal budgets and certain tax-exempt sectors.
Investors should also expect additional headlines about underfunded pensions and municipal bankruptcies. While both issues are serious, they deserve some context. To start, most states are considered to be sufficiently funded, but the news reports will focus on the handful that are not. Also, the worst pension issues, such as those in Illinois, are not current issues for the market. This does not mean that pension deficits should not be dealt with immediately, but, in most cases, it will be years before the liabilities will need to be paid out. Delays in dealing with pension issues, however, could contribute to credit rating downgrades.
Another municipal bankruptcy would generate headlines, but it is important to recognize the rarity of Chapter 9 filings. After all, the California cities that are currently in bankruptcy—San Bernardino and Stockton—are only two among 482 municipalities in the state. In addition, ongoing credit research could assist investors in avoiding not only those municipalities that are bankruptcy risks but also those that are facing consistent economic deterioration.
3) Tangential Factors in Play
In addition to the municipal bond market's idiosyncratic issues, it also faces some factors that can affect the broader capital markets. Of those factors, monetary policy has perhaps had the most significant effect. And although this policy accommodation appears set to continue through 2013, it deserves constant monitoring.
The prospects for further Federal Reserve accommodation are based on its recent decision to tie the fed funds rate to an unemployment rate of 6.5% and an inflation target of 2.5%, both of which remain firmly in the distance from their current levels. In addition to keeping short-term rates low, the distance to those targets should also continue the Fed's quantitative easing initiatives through the first half of 2013 at the very least, thus potentially keeping long-term rates near their historically low levels.
Economic growth is expected to continue, albeit at its current, relatively sluggish pace. If the pace of growth were to accelerate, this could prompt the Fed to curtail some of its asset purchases, and, consequently, long-term rates could move higher. This scenario could potentially benefit the more credit-sensitive segments of the municipal market because a strengthening economy should improve overall credit quality and consequently tighten credit spreads.
Another issue that could affect certain segments of the municipal bond market is the implementation of the Patient Protection and Affordable Care Act, which is scheduled to be in place by January 2014. There are some widespread uncertainties about how the various components of the act will be enacted, which could affect the healthcare/hospital portion of the municipal bond market. Still, hospitals have been given a lot of lead time to prepare for these changes, so most of them should be well positioned for the Affordable Care Act's eventual implementation.
4) Reading the Tea Leaves
The combined prospects for headline events that are specific to the muni market and the broader factors that can affect all the capital markets support some expectations we have for the muni market in 2013.
5) Areas of Opportunity in 2013
Municipal bond opportunities in 2013 could begin with the overall asset class itself for tax-sensitive investors in the upper tax brackets. After all, the recently passed tax package (the American Taxpayer Relief Act of 2012) phases out some exemptions and limits deductions. For many investors, these adjustments may underscore municipal securities as one of the remaining viable tax havens.
At the higher household-income levels, those making more than $450,000 could have an effective tax rate of 43.4% when considering the recent increase in the marginal tax rate to 39.6% and the 3.8% Affordable Care tax on investment income that begins in 2013. The increase in the effective tax rate could translate into a tax-equivalent yield of 5.87% on the Barclays Municipal Long Bond Index, which was about 258 bps above the taxable yield on a 'BBB' rated segment10 of the corporate bond market, as of December 31, 2012.
It is also important to remember that the Affordable Care levy applies to households making more than $250,000. Therefore, these additional taxes could actually mean that these households have a tax rate that is close to the previous top rate of 35%.
In addition, state income taxes could also rise, such as in the case of California's recent increase in income taxes. As a result, investors in higher-tax states could also find enhanced opportunities in tax-exempt securities, particularly those issued from entities based in their state of residency. [It is important to note, however, that municipal securities may be subject to the alternative minimum tax, and, in certain cases, federal, state, and local taxes may still apply.]
Based on the previous considerations, the specific areas of opportunity within the market in 2013 could include:
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
A Note about Risk: The value of investments in debt securities will fluctuate in response to market movements. When interest rates rise, the prices of debt securities are likely to decline, and when interest rates fall, the prices of debt securities tend to rise. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Investments in high-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Lower-rated investments may be subject to greater price volatility than higher-rated investments. A portion of the income derived from a municipal bond may be subject to the alternative minimum tax. Any capital gains realized may be subject to taxation. Federal, state, and local taxes may apply. There is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-exempt income. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. No investing strategy can overcome all market volatility or guarantee future results.
Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.
The credit quality of the securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor's, Moody's, or Fitch, as an indication of an issuer's creditworthiness. Ratings range from AAA (highest) to D (lowest). Bonds rated BBB or above are considered investment grade. Credit ratings BB and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principal on these securities.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.