What’s Behind the Muni Market’s Current Strength?
Lord Abbett Portfolio Manager Dan Solender breaks down the factors driving the municipal bond market.
Air Date: May 5, 2021
Hello, my name is Dan Solender, I’m a partner and director of tax-free fixed income for Lord Abbett.
INTERSTITIAL: Municipal Market Overview
What a year it has been and what a great stretch of performance for the municipal bond market. 2020 ended up being a being a good year for performance and 2021 so far has been very strong. Pretty much every part of the market has been positive, whether it's short-term, intermediate, long-term, investment grade, [or] high yield, and the market is performing very well.
Some of the reasons for this, are, first of all, credit [quality] did hold up after those concerns last year. It was either good balance sheets, fiscal stimulus, people spending in different ways making revenues come in, [or] incomes holding up, because everything turned out pretty well. And we saw some negative moves in ratings, but very, very minor. Overall, things have held up.
And now, as we enter the new year, we're seeing more fiscal stimulus, the economy is opening up with [COVID-19] vaccinations getting disseminated, and things are just looking much more attractive going forward. So from that perspective, [things have] been very good.
Also, looking at demand and supply, we're a retail market--70% of municipal bonds are owned by individuals either in managed products or brokerage accounts--so we're very dependent on supply and demand.
Now the demand side, through the first four months of 2021, we’ve had over $40 billion come into municipal bond mutual funds. If you just stopped at this point in the year, [it would be the] fourth highest year for municipal bond fund flows we've seen since it’s been tabulated starting in 1992.
And last year ended up being a very strong year too, right around $40 billion as well, but last year it was in investment grade—high yield had net outflows for the year. This year, everything is seeing inflows--high yield, investment grade, and long, intermediate, and short [maturities] across the board. People are looking very positively on the market; as we get through April, the pace has been increasing, not slowing down. So people are very comfortable, very interested in investing in municipal bonds right now.
On the supply side, we've seen lower than average supply, not a huge amount of supply. We still have about a third of the bonds in the municipal bond market going to taxable [municipal bonds], just because of the changes from the tax bill in 2017, making issuers need to go the taxable markets to refinance outstanding bonds. So on the tax-exempt side, we've had decent supply, but not enough to really overwhelm the market and actually we could use more.
INTERSTITIAL: Tax Questions
And then, if you add on top of that, not only do we have some of these very positive technical indicators, we also have a Biden administration that is looking to raise taxes.
Now we don't know what they're going to do at this point, we don't know if it will be individual or corporate taxes raised, or nothing, but we know that tax rates [likely] aren’t going down. And if they do go up, what's interesting is that if it’s just these corporate tax rates that go up, banks and insurance companies historically were very big buyers of municipal bonds, until demand really slowed down since the tax law in 2017 lowered the corporate tax rate. If it goes up, not only would we have the strong individual demand we keep seeing, but we might have the institutional demand as well from the banks and insurance companies.
So a lot of very positive dynamics, a lot of things are making us perform well and the outlook is pretty good going forward.
Well, thank you, we appreciate your listening to us today, and we appreciate your continued interest in Lord Abbett.________________________________________
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