Amid Rising Rates, Muni Bonds Remain Resilient | Lord Abbett
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Market View

Here’s a look at some of the key trends that have continued to support the municipal bond market.

Read time: 2 minutes

While other asset classes have been whipsawed by recent inflation concerns, municipal bonds have weathered the recent volatility relatively well. U.S. Treasury yields rose and U.S. equities fell after the May 12 announcement that the U.S. Consumer Price Index (CPI) soared 0.8% in April, matching the largest monthly increase since 2009. While municipal bonds were not completely unaffected by the news, the sector has continued to benefit from strong technical factors (more on that later).

In the wake of the CPI announcement, muni yields did move higher in sympathy with taxable fixed income sectors, but municipal bonds still outperformed U.S. Treasuries. Longer-dated municipal bonds continue to outperform, with 30-year yield ratios (AAA-rated munis versus comparably dated U.S. Treasuries) grinding close to their all-time lows reached earlier this year, as shown in Figure 1.


Figure 1. Yield Ratios Near Multi-Year Lows Point to Muni-Market Strength
Yield ratios of AAA-rated municipal bonds versus U.S. Treasury securities of comparable maturity, May 20, 2020–May 19, 2021
Source: Barclays. Data as of May 19, 2021.
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Investors may experience different results.
Past performance is not a reliable indicator or guarantee of future results.


Technical Talk

Now, about those technical factors (i.e., supply and demand) mentioned earlier. This year, municipal-bond mutual funds have continued to experience robust inflows while issuance of new muni bonds has not kept pace.

Demand: Despite the significant move higher in rates this year, mutual fund demand for municipal bonds has remained robust. Lipper reported combined weekly and monthly inflows of $2.3 billion for the period ending May 12, bringing year-to-date inflows to $46 billion. As Lord Abbett Partner and Director of Tax-Free Fixed Income Dan Solender noted in a recent video, “this year, everything is seeing inflows--high yield, investment grade, and long, intermediate, and short [maturities] across the board … people are very comfortable, very interested in investing in municipal bonds right now.”

Supply: Overall municipal bond supply has remained lower than average thus far in 2021, based on SIFMA data cited in a Barclays report.1 Following $7 billion in issuance last week, year-to-date muni bond issuance was $157 billion as of May 19, and net supply2 was $63 billion. Issuance has been lower in healthcare, education, and state and local governments, while the transportation, utility and housing sectors have been surpassed last year’s pace.

A Final Word

With many potentially supportive conditions still in place – stimulus to support state and local government budgets, record investor inflows, and overall improvements in credit quality on the U.S. reopening – we believe municipal bonds are positioned for solid performance in the months ahead. We think healthcare and transportation related credits--among the top performers in April--continue to present potentially attractive opportunities as the number of vaccinated Americans increases and the pace of economic recovery accelerates.

As Solender also noted, on top of the favorable technical indicators, the possibility of higher U.S. tax rates based on proposals from the Biden administration may lend additional appeal to the asset class. With some “very positive dynamics” at play, he believes the outlook remains “pretty good” for the $3.9 trillion municipal bond market going forward.


1Barclay’s Municipal Weekly, May 14, 2014.

2Net of called or matured municipal bonds.


A Note about Risk: 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. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk. Credit risk is the risk that debt issuers will become unable to make timely interest payments, and at worst will fail to repay the principal amount. Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements. 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. Income from the municipal bonds held could be declared taxable because of changes in tax laws. 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. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long term, especially during periods of downturn in the market.

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

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

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

The credit quality of fixed-income securities is 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.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.



    Market View


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