The Investment Conversation: What’s Driving the Muni-Bond Market?
PODCAST - 2018 Midyear Investment Outlook
The Investment Conversation: What's Driving the Muni-Bond Market?
In this podcast, Dan Solender explores the factors that have spurred demand for - and reduced the supply of - municipal bonds.
VO: Welcome to The Investment Conversation, Lord Abbett's ongoing podcast series.
VO: Hello, this is Will Andrews, digital media editor for Lord Abbett. What might the rest of 2018 hold for investors? To find out, we recently gathered five of our investment leaders for a roundtable discussion on the midyear outlook. Visitors to lordabbett.com can view related articles and videos at lordabbett.com/midyearoutlook.
VO: One big factor in the first half was the U.S. tax legislation enacted in December 2017. Dan Solender, director of municipal bonds for Lord Abbett, says it's had a significant effect on the supply of new muni bonds in the market:
Solender: The tax policy had a tremendous impact on the municipal bond market this year. We can break it down from a supply and demand perspective. On the supply side are new issue supplies, where new bonds coming into the market were down about 15% year to date. A lot of it has to do with what was changed in the tax bill-- in the past, municipalities and issuers were able to refinance bonds in advance of their call dates. They're not allowed to do that anymore because of the tax legislation. So that was about 25% to 30% of last year's issuance, and typically it's around that amount. Advanced refunding bonds can't be issued anymore in the market. They have to wait until their call date.
A second thing is that a lot of supply was pushed into December of last year, anticipating what could happen in the tax bill. So we had a record month last December, and then the first quarter of this year was very slow for us. So supply is very low, slowly picking up, but still behind the pace of previous years.
VO: Solender also had some thoughts about how the tax law has spurred demand for munis, and its broader market impact:
Solender: On the demand side there's a retail component to it with the changes in the tax laws. The so-called SALT cap on state and local taxes is a big deal, because there are not as many exemptions for investors anymore. There's a cap on deductions. There's a smaller amount of mortgage interest deductions now. But the important thing is that for municipal bonds, the tax-free status wasn't affected. So we're seeing a tremendous demand from individual investors for municipals; it's been large for a while, and it's kept increasing.
So overall, the tax bill had a big impact on our market. It's going to keep investors interested. In states like California and New York with high tax rates, the demand from individuals has been really strong. And this tax bill has really just increased the benefit for municipal bond issuers. Earlier, we talked about the strength of the U.S. economy. Revenues are very strong across the country too. We've seen states across the country benefit. For example, a few years ago California was being compared to Greece, and now they're so strong, they're trying to figure out what to do with their surplus revenue. So, there are a lot of things that have been very positive from the tax bill.
VO: That's it for this edition of The Investment Conversation. As always, you can access a full range of investment commentary and analysis at lordabbett.com. Thanks for listening.
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