Munis Enjoy Best Week in Nearly 30 Years
Fed policy actions and more than $2 trillion in fiscal stimulus fueled a spirited rally in municipal bonds but palpable risks remain, write portfolio managers Kathy Krieg and Ozan Volkan.
The investment-grade municipal bond market staged a robust recovery this week, posting some of the strongest weekly gains in nearly 30 years. Indeed, the Barclays Capital Five-Year Municipal Bond Index is up 5.6% this week. Liquidity dramatically improved, as the $2 trillion fiscal stimulus bill was just passed in the House of Representatives. Throughout the week, the muni market reacted positively to reports of the sizeable aid that will flow to state and local governments. In addition, the provisions that allow the Federal Reserve to buy municipal debt across the entire maturity spectrum lifted munis.
Wild Ride
The yield on the Bloomberg 10-year AAA municipal bond index has whipped around for the past two weeks.
The 10-year AAA yield began the month at just around 1%, only to spike to nearly 2.90% on March 22. Today, Friday March 27, the yield on the average AAA 10-year municipal bond is back down to approximately 1.46%.
For OIA tax-exempt investors, we believe the stimulus bill is a big win for the majority of our investment grade, general obligation and essential service issuers. There will likely be some revenue shortfalls in fiscal 2021 in areas that have been hit hard by the virus, specifically New York and New York City. We are hopeful that subsequent aid packages will help state governments minimize budget deficits.
Overall, we view the monetary and fiscal stimulus actions we have seen this week as a great start to supporting the municipal markets. In turn, we believe a reinvigorated muni market will be instrumental in restarting the economy across the country. Still, we’re only in the beginning stages of an economic slowdown of unknown magnitude and duration. Even prior to the Covid-19 crisis, OIA’s investment theme has always been to invest in high-quality credits that have successfully weathered various exogenous shocks such as the 9/11 terrorist attacks, 2008 financial crisis and various natural disasters including Hurricane Katrina and Superstorm Sandy. We believe—now more than ever—it‘s important to stick to our conservative, high-quality investment discipline.
As this crisis unfolds, we will continue to monitor our portfolios for deteriorating fiscal profiles and, more importantly, any market dislocations that provide our clients opportunities to invest in solid, long-term, high-quality investments.
For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Advisor.
Tax-exempt municipal bonds are issued by state and local governments as well as other governmental entities to fund projects such as building highways, hospitals, schools, and sewer systems. Interest on these bonds is generally exempt from federal taxation and may also be free of state and local taxes for investors residing in the state and/or locality where the bonds were issued. However, bonds may be subject to federal alternative minimum tax (AMT), and profits and losses on bonds may be subject to capital gains tax treatment. Municipal securities may lose their tax-exempt status if certain legal requirements are not met, or if tax laws change. The financial condition of the issuer may change over time and it is important to monitor the changes because they may affect the ability of the issuer to meet its financial obligations. The MSRB's EMMA website (www.emma.msrb.org) allows investors to sign up to receive alerts about the availability of important information that may affect their municipal bonds. The MSRB makes official statements and continuing disclosures submitted to it by issuers and others available to the public for free through its EMMA website. EMMA also provides municipal securities trade price information through its Real-time Transaction Reporting System ("RTRS") and free public access to certain municipal credit ratings. See more at: http://www.finra.org/investors/alerts/municipal-bonds_important-considerations-individual-investors#sthash.snkM0mxf.dpuf
Special Risks of Fixed Income Securities: There is a risk that the price of these securities will go down as interest rates rise. Another risk of fixed income securities is credit risk, which is the risk that an issuer of a bond will not be able to make principal and interest payments on time. Liquidity risk refers to the risk that investors won’t find an active market for a bond, potentially preventing them from buying or selling when they want and obtaining a certain price for the bond. Many investors buy bonds to hold them rather than to trade them, so the market for a particular bond or a small position in a bond may not be especially liquid and quoted prices for the same bond may differ.
High yield fixed income securities are considered to be speculative and involve a substantial risk of default. Adverse changes in economic conditions or developments regarding the issuer are more likely to cause price volatility for issuers of high yield debt than would be the case for issuers of higher grade debt securities. In addition, the market for high yield debt may be less attractive than that of higher-grade debt securities.
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