(New York)
Munis have long been very popular with HNW clients because of their tax exempt income. However, a new—and slightly confusing—part of the industry is increasingly becoming popular. That new niche is taxable muni bonds. According to Barron’s “Taxable municipal bonds are the fastest-growing sector in U.S. fixed income. This year, issuance has totaled more than $170 billion, double the $85 billion sold in all of 2019. The total market has grown to $700 billion—sizable but still below the $3.7 trillion tax-exempt muni market”. Many think the new vaccines will give a boost to munis, which have suffered under COVID.
FINSUM: If you are interested in this market, check out Invesco’s Taxable Municipal Bond ETF (BAB).
(New York)
There has been a lot of talk about stocks this year, and a great deal of consternation about rates and bond prices. Yet despite all this, or maybe because of it, a middle-ground asset class has become one of the best performing of the year. Convertible securities are having a banner year. The $325 bn sector has returned over 36% through the end of November. A big portion of the gains has come from the outperformance of Tesla, which accounts for about 10% of the convertibles market. But there have been other nice victories too, such as “reopening” stocks like Carnival, Southwest Airlines, Lyft, American Airlines, and Dick’s Sporting Goods.
FINSUM: Converts do a good job capturing upside while protecting against upside, and this year has been a perfect storm for them.
(New York)
Investors need to keep a very sharp eye on the bond market. The yield curve is steepening without any associated rise in economic activity. The reason why has to do with the election. Biden has been rising in the polls, and investors have been increasingly betting he will emerge victorious as part of a blue sweep. If that happens, it is assumed the US would issue a great deal more debt to fund stimulus packages. This means there would be significantly more Treasury bond supply than at present, and potentially calls into question the credit of the US government. As evidence of this trend, the spread between 5- and 30-year Treasuries just hit its largest since 2016.
FINSUM: This is a potential black swan event that no one has seen coming. The election seemed like it would be a dead heat through election day, but if the needle moves more towards Biden, the whole picture for fixed income will change.
(New York)
The fixed income market used to be where you went for safety and steady income. Those days seem long ago, and fixed income is not just as likely as any other asset class to eb the riskiest and most volatile in your portfolio. Between COVID and the Fed, interest rates are extremely low, with yields low and bond price very high, and vulnerable. Some have been comparing the situation to Japan in the 1990s and beyond, but there is a huge difference that makes the US bond market much worse than Japan ever was—inflation. When Japan started its massive zero rate, ultra-low yield period, it was experiencing deflation, which meant there was still a positive real rate. But that is not true in the US today, as yields are actually well below real-world inflation, meaning genuinely negative real interest rates.
FINSUM: There is ultimately going to have to be a reckoning in the bond market, because real returns are not sustainable. That said, it does not seem like the Fed is going to let that happen any time soon.
(New York)
The muni market is doing great, at least on paper that is. Muni bonds have seen an absolutely furious rally over the last few months, which has driven yields to the lowest level since the 1950s. However, many municipalities have huge budget deficits, so the trick is to buy prudently. Eaton Vance published a piece with a state by state analysis of financial health, since the pain of tax revenue losses is not spread evenly. There are multiple ways to look at the info. The states who will see a 20%+ fall in revenue include: Idaho, Wyoming, North Dakota, Oklahoma, Missouri, New York, Alaska, Maine, West Virginia, Louisiana, and New Jersey. The top ten states for creditworthiness (meaning the most creditworthy) according to Eaton Vance are Idaho, Wyoming, South Dakota, Utah, Nebraska, North Dakota, Tennessee, Iowa, Virginia, and Minnesota.
FINSUM: New York and New Jersey are the most alarming ones on this list, since they are seeing big revenue falls and were already in quite poor financial condition. Illinois is obviously troubling too, as it is dead last in creditworthiness and likely to see a 13%+ fall in revenue.
(New York)
Muni bonds have been on a relentless rally. Any advisor is surely aware of this because there is likely a lot of their client’s money in the space. The inflows have been so sharp, and the price action so swift, that average ten-year yields in munis are at 0.7%, the lowest since the 1950s. At the same time, the COVID pandemic has decimated local and state budgets and there is a $1 tn budget deficit. Worse, the federal government has no clear plans in place to help local and state governments, meaning such municipalities may not be bailed out any time soon.
FINSUM: So on the one hand you have soaring prices, and on the other, significantly eroding credit quality. In any normal circumstance this would be seen as a bubble. However, given that Washington does seem likely to offer some aid to local governments, a meltdown will probably be avoided—but not without some volatility along the way.
(New York)
There is alarm growing among muni bond investors as credit quality continues to deteriorate. During COVID there has been a widening gap in pension deficits among municipalities, and investors are keeping a close eye because it is leading to deferred pension payments. This is troubling for a number of reasons. Firstly, it digs municipalities into a bigger hole because they must pay interest on deferred payments; and secondly, it spooks bond markets and makes it harder for them to access liquidity. In other words, deferred pension payments, such as the nearly $1 bn one New Jersey elected to do in May, dig muni issuers into a deeper and deeper hole.
FINSUM: Pension recipients are very likely to be considered senior to bondholders, so this is a very alarming situation for investors.
(New York)
One of the best ways to watch the damage to the economy is to monitor the performance of consumer debt. Auto loans, student loans and beyond give a clear indicator of the health of American finances. Right now, the data is looking bad, reinforcing why this might be a long and difficult recovery. According to the WSJ, “Americans have skipped payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit the U.S … The largest increase occurred for student loans, with 79 million accounts in deferment or other relief status, up from 18 million a month earlier. Auto loans in some type of deferment doubled to 7.3 million accounts. Personal loans in deferment doubled to 1.3 million accounts.” The total of deferments is triple the number from the end of April. Lenders, who have generally been accommodative to this point with borrowers, expect delinquency to soar later this year.
FINSUM: You cannot have 50m people—roughly a third of the US workforce—lose their jobs and not have any repercussions. This is the kind of data that makes stock indexes look rather ludicrous right now.
(Chicago)
You might not pay much attention to them—most don’t—but closed end muni funds are an excellent deal right now. They are offering high yields relative to other fixed income peers. For example, you can readily get 5% yields on CEF muni funds, equivalent to an 8.45% taxable yield if you are in the top tax bracket. And to be clear, these are not junk muni bonds. The reason yields are so strong is leverage gained from borrowing money at short-term interest rates and buying longer-term bonds. That usually creates a risk that short-term rates could rise, causing losses. However, given the Fed’s position right now, that seems highly unlikely.
FINSUM: This is an ideal time to by CEF muni funds given the low rate risk and solid overall yields. Check out BlackRock’s MFT (5.39% yield), Putnam’s PMM (5.18%), or BNY Mellon’s LEO (5.56%).
(New York)
Muni bonds are seeing yields way above average right now even as Treasury bonds linger near all-time lows. The reason why is that it is increasingly apparent that there has been a huge erosion in municipal credit quality alongside the lockdown. Costs have surged at the same time as revenues have plummeted, leading to a significantly deteriorated financial picture for municipal issuers. The has been exacerbated by the fact that municipalities have largely been unsupported by the Fed as opposed to corporate issuers. But the sell-off has created opportunity, as even AAA issuers are seeing big discounts and much higher than usual spreads to Treasuries.
FINSUM: This is all about careful credit selection, as there are big opportunities, but there may also be major pitfalls.
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(New York)
The bond market is usually ahead of the stock market in predicting and reacting to the economy. It seems to be doing so again. While stocks have had a huge run higher, bond yields have largely been stuck at very low levels. The ultra-low yields of around 0.7% on the ten-year Treasury mean that bond investors see a long, hard, recovery looming and many years of continued aggressive monetary stimulus by the Fed.
FINSUM: Stocks seemed to have gotten a dose of realism over the last two weeks, but yields may be more reflective of the difficulty of the recovery to come.
(New York)
One of the aspects of this bear market that has really alarmed investors is the speed with which the market has rallied from its lows. Huge gains of well over 35% have shocked investors into feeling like indexes are bound to fall again. In some sense that sentiment makes sense since it has happened before, such as in the dotcom bubble. However, according to BlackRock, it is absolutely time to go risk-on, but with a twist. The asset manager says that sovereign bonds have very little upside or protection to offer right now, so instead investors should put their capital into credit and higher-quality equities. “Over the next six to 12 months, we favor credit over equities given bondholders’ preferential claim on corporate cash flows and prefer an up-in-quality stance in equities”.
FINSUM: We particularly like the argument about sovereign bonds not offer much right now. With central banks already at their zero lower bound and sovereigns priced very highly, there is just not much to gain and plenty to lose.
(Chicago)
The muni market is at an interesting crossroads. There have been big fears that the current lockdown might be a huge negative for muni credits. The lockdown not only raises costs, but it constrains tax revenue at the same time. On its own, this is a big threat. However, the Fed has set up a liquidity facility particularly for states and municipalities to borrow, which is a major help. That said, analysts say some credits will be excluded. The problem is that the Fed has put limits on the size of cities and counties able to participate, as well as fairly onerous language, such as municipalities having to promise that they cannot “secure adequate credit accommodations from other banking institutions”.
FINSUM: The Fed’s restrictions on this program are surely going to constrain its efficacy. So, on the whole this seems like good news, but not as good as investors would like.
(New York)
This is a difficult time to be any kind of investor, but being one trying to get yields out of equities is particularly hard-bitten at the moment. Dividends are being cut left and right, so investors need to turn to other options, but much of fixed income looks very scary. That said “Quality yield is on sale”, according to a fund manager at Tocqueville Asset management who specializes in income investments. “Don’t ignore the rest of the capital structure”, says another fund manager at Socoro Asset Management. For instance, look for things like a JP Morgan Chase preferred security with a fixed coupon of 5% and yield-to-call of 7.72%, or Invesco’s Variable Rate Preferred ETF (VRP), yielding 4.85%.
FINSUM: These are good suggestions. For a yield that will really knock your socks off, take a look at the Virtus Private Credit Strategy ETF (VPC), which owns many BDCs and CEFs and has been beaten up in the selloff, but yields a whopping ~18% net of expenses.