Bonds: Munis
The $4 trillion municipal debt market is expected to have a “bounce back year” in 2023, according to Charles Schwab’s Cooper Howard. The director and fixed-income strategist for the Schwab Center for Financial Research said in a recent Bloomberg TV interview that “A slower pace of interest-rate hikes, attractive yields, and relatively healthy state and local government finances should lure investors back after demand plunged this year.” He also stated “Credit quality is very high in the municipal bond market. State and local revenues have surged to record-level highs driven by the economic recovery. Given the rise in yields, it is more attractive for retail investors, so there will be more demand coming into the market.” Munis had fallen out of favor due to a combination of inflation and recessionary concerns. According to data compiled by Bloomberg, muni sales are down nearly 19% this year at about $351 billion. However, 10-year municipal yields have more than doubled since the start of the year. While recessionary fears may continue, the municipal market won’t be as affected due to healthy credit ratings. Howard expects municipal debt tied to public transportation to lead the rebound as the airline industry is bouncing back.
Finsum:Schwab strategist Cooper Howard predicts a bounce-back year for munis due to slow rate hikes, attractive yields, and healthy credit in state and local governments.
Last week, Charles Schwab announced the upcoming launch of the Schwab Municipal Bond ETF (SCMB). The ETF, which is expected to begin trading on October 12, will trade on the NYSE Arca. SCMB will have an expense ratio of only 0.03%, which will be much lower than comparable funds. The ETF will provide access to the broad U.S. investment grade, tax-exempt bond market. The fund’s goal is to track the total return of the ICE AMT-Free Core U.S. National Municipal Index, which measures the performance of the U.S. AMT-free municipal bond market. SCMB seeks to provide income exempt from federal taxes and is not subject to the federal alternative minimum tax. The ETF will have a high credit quality profile, investing only in investment-grade rated securities. John Sturiale, Head of Product Management and Innovation, Schwab Asset Management, stated, “As bond yields have risen, fixed income investing is more attractive than it has been in years, making this an opportune moment to introduce a new choice for investors seeking a low-cost, straightforward approach to income, diversification and risk management in their portfolios.”
Finsum: Charles Schwab is launching an ultra-low-cost Municipal bond ETF targeting investment-grade securities.
Investors are shucking aside overpriced, actively managed funds and sinking money instead in less expense index ETFs, said Dave Nadig, financial futurist at research and consulting firm Vetta Fi., according to thinkadvisor.com.
Strong inflows have culminated from ETFs highlighted by dividend strategies, munis and high yield bonds, he continued.
Among most active investors, ETFs have emerged as the go to vehicle, Nadig continued. On top of that, for most investors, they’ve evolving into the default choice.
This year – in the eye of the worst worse financial markets in decades – the country’s $6.6 trillion ETF generated $375 billion in net inflows. And it’s been share and share alike as the wealth is spreading across the board. For example, positive inflows into equities, currencies and alternatives has reached into the billions of dollars, the site reported Nadig pointing out.
“It’s been one of the circumstances where the entire ETF universe has caught a bid,” Nadig said.
A Fitch Ratings reports shows the likelihood that U.S. investors will continue to rachet up their fixed income exchange traded fund holdings, according to pioline.com.
On the heels of new guidelines kicking in in the Big Apple last December, Fitch indicated its rated 10 such ETFs. Doing so has helped ease the way for investors to maintain shares of them.
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The muni market has seen sky-rocketing volatility the last ten days with the highest point since the onset of the pandemic. That volatility has hurt many investors as yields rose by over 11 basis points sending bond prices tumbling. Triggering this decline in muni bond prices was Fed Chair Powell’s hawkish turn which included tapering asset purchases and raising rates. This loss is positioning munis for their worst quarter in almost 30 years. Some muni bond issuers are pausing or flat out canceling their development in the wake of a flat out crisis.
Finsum: This could be a quarter for muni bonds which have a close pass through to the Feds target interest rate and are therefore more sensitive.
Muni ETFs have set a record for inflows this year drawing a whopping $83 billion. Bond buyers are fleeing the low yield big government debt with inflation risk and flocking to Muni funds which have more attractive fees and still have some after-inflation yield. Active funds are seeing a large uptick as a subsegment with big winners like JPMorgan Ultra-Short Muni Income ETF, and new active funds are popping up at a fast rate. Institutional investors see lots of growth in active fixed-income ETFs as more investors are chasing outperformance in a stagnant bond market.
FINSUM: As the Fed comes down on the treasury market, muni’s are in a prime position to get yield pass through to fight against inflation.
Muni clients concerned about rising rates? See how staying the course vs. moving to cash stacks up. See More