A Closer Look at High Yield Munis
Lord Abbett Portfolio Manager Dan Solender examines potential opportunities among high yield municipal bonds.
Air Date: May 13, 2021
Hello, my name is Dan Solender, I’m a partner and director of tax-free fixed income for Lord Abbett.
INTERSTITIAL: The Backdrop for High Yield Munis
Now a really interesting part of the municipal bond market is the high yield municipal bond market because that's an area where last year, it lagged for most of the year. If you look at what was going on last year back in the Spring, Triple As and Double As were coming on and lower quality [municipal debt] was really lagging. It wasn't until we got to November and the [COVID-19] vaccine was announced, that high yield started coming back. And this year, through the first four months of 2021, high yield has outperformed.
Some parts of the market have seen spreads come back to where they were back in March of 2020 before the pandemic, but some are still wider, so has been a range of performance…but [overall] we're seeing [the market] do very well. And we think the reason it’s doing very well, is because, first of all, default rates have stayed very low. There was a lot of concern, a year ago about default rates; they are low, there are a few pockets of the high yield municipal bond market such as senior living [facilities] that are seeing some stress, but it’s very small parts of the market, not huge parts of the market.
INTERSTITIAL: Sector Spotlight
And we still see a lot of very attractive things, particularly with the economy picking up steam right now, or at least getting more solid than it was last year. So areas like hospitals…[ you remember, a year ago, hospitals were having to take in COVID patients and stop doing elective surgery for a while. Elective surgeries are a higher margin business. The rating agencies got negative on the credit for healthcare, [but] they've held up very well with good balance sheets. And people coming back now and doing elective surgery, and the hospitals are in pretty good shape. But the spreads are still wider, they’ve still underperformed and we think that's a good part of the high yield and lower investment grade market to participate in.
We're also seeing industrial development bonds, things tied to corporations. Corporations do issue municipal bonds for some reasons. You see corporate earnings coming in very strong. commodity prices doing well, the economy, doing well, so we think there's a lot of attractive corporate credits in the lower quality part of our market to buy as well. So a lot of different things are doing well.
INTERSTITIAL: Closing Thoughts
And [as] you look at the demand, municipal bond fund flows are really strong in the high yield part of the market and there's not that much supply. And when deals come to the market that are appropriately priced, there's just a lot of demand for them.
So it’s a very good place in the market to be: spreads are coming in, but still look attractive [given the] the outlook for the economy. It still continues to be a very good place to be going forward as the yields look attractive relative to other markets.
Well, thank you, we appreciate your listening to us today, and we appreciate your continued interest in Lord Abbett.________________________________________
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The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. 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. 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. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. 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. Lower-rated bonds may be subject to greater risk than higher-rated bonds. No investing strategy can overcome all market volatility or guarantee future results.
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