What’s Behind the Muni Market’s Current Stength? | Lord Abbett

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Fixed-Income Insights

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.


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.


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.

No investing strategy can overcome all market volatility or guarantee future results.

Market forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

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.

The credit quality of the securities in a portfolio are 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.

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