Municipal Bonds: Monitoring the Market
AM with a PM
Dan Solender, CFA
Partner & Director
Air Date: February 10, 2021
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Hello, this is Dan Solender, I’m director of tax-free fixed income and a Partner at Lord Abbett.
INTERSTITIAL: Municipal Bonds: The Current Environment
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We're off to a very good start this year and in the municipal bond market so far this year, everything is really working well. So far, some of the big things going on are that demand has been strong [while] supply is on the lower side. Credit quality is holding up well. Everything really started to turn even more positive back in November  when the vaccine became known, [B-ROLL: Vaccine footage] and an expectation came up that it was going to be disseminated, which has been a big turn.
And then the bigger trigger, more recently, has been the Biden Administration wanting to put through a large fiscal stimulus package which is working its way through Congress. [B-ROLL: U.S. Capitol] We think all that put together gives signs that the economy has a light at the end of the tunnel, because when the vaccine gets disseminated more people can obviously return back to normal.
And the fiscal stimulus will target a lot of parts of the municipal bond market that can use the funding. It's not just the state and local governments--they get the biggest attention. But it's also things like [B-ROLL: Airports, hospitals, etc.] airports and hospitals and universities and school districts--all kinds of things can get funding from the fiscal stimulus to help them through this time.
And one thing we've seen over the last year is that expectations got really, really low back in March or April --expectations of where tax revenues would come in, expectations of how credit would perform. But now that we've gone through this time period we've seen that revenues only dropped a little bit, not that much, and states are holding up much better. A lot of the things like airports, toll roads have much better balance sheets than people expected. And with the help from the original CARES Act they made it through okay. [LOWER THIRD: CARES Act refers to the Coronavirus, Aid, Relief and Economic Security Act, a $2 trillion economic relief packaged enacted in 2020 in response to the pandemic.] to individuals and businesses and provides other financial assistance as compensation for the havoc the virus has caused. So a lot of things are holding up just like that and other sectors as well.
So, as we get to this part--as we get into February now we're seeing [that] this year the best performing part of the market has been lower quality, which really lagged last year. If you look at actually the flows into municipal bond funds in 2020 they were actually the fourth highest in history, at about $43 billion, but high yield municipal bond funds actually were in net outflows. [LOWER THIRD: All mutual-fund flow information is based on data from Refinitiv Lipper.] are from Now that's turning positive; flows are coming in across the board and all different types of maturity—long, intermediate, short--high yield, investment grade, separately managed account funds everywhere, so the demand has been good, as people are getting comfortable with this economy and looking at the relative value versus other markets and thinking it looks good.
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So that's one thing and then you know the [U.S.] fiscal stimulus is the other, and then the supply, we are seeing a time period when supply is not that high. And even last year it looked like supply was high, but in reality, a lot of it was taxable municipal bonds [issued] in reaction to the previous  Tax Act, a couple years ago.
So looking forward, demand is good, supply is good, credit has held in and is doing better. We see a light at the end of the tunnel. We [the municipal bond market] performed very well this year but there's still room to come back even further versus where we were a year ago before the pandemics, so the outlook just looks good and municipal bonds were off to a great start, we appreciate all the interest everywhere shown in our product, so thank you for your time, thank you for your interest in our firm and we look forward to seeing what comes out of the fiscal stimulus and looking at how the rest of the year unfolds, which seems pretty good right now.________________________________________
Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.
Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.
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Market forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
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