/perspectives/sector-views/municipal-bonds-riding-the-wave
Municipal Bonds: Riding the Wave
Continued strong demand enables move up in credit quality.
After reaching all-time lows in municipal-to-Treasury ratios in May, municipals’ performance began to experience relative softness throughout the third quarter. While long-duration Treasury yields fell to all-time lows in August, ratios reset to higher levels, contributing to the end of 10 consecutive months of positive performance for the Bloomberg Barclays Municipal Bond index. The municipal market’s streak of consecutive weekly inflows continued for 2019, accumulating to $74 billion year to date, offsetting the 19 percent year-over-year increase in new issue supply.
Taxable new issuance, which surpassed $40 billion for the first time since the Build America Bonds program in 2009–2010, boosted overall supply.
Taxable Muni Bond Issuance Is on Pace to Surpass $40 Billion
Taxable new issuance, which surpassed $40 billion for the first time since the Build America Bonds program in 2009–2010, boosted overall supply.
Source: Guggenheim Investments, BondBuyer, SIFMA. Data as of 10.31.2019.
Crossover buyers welcomed the surge in taxable new issuance, as it offered name diversification, lower default probability, healthy ESG factors, and lower correlations to corporate markets. Since September, issuers have capitalized on the Treasury rally by issuing taxable bonds not only for new money, but for advance refunding of tax-exempt bonds. Although the Tax Cuts and Jobs Act eliminated advance refundings with tax-exempt bonds, the arithmetic of the current rate environment has encouraged issuers to execute similar financing strategies with taxable bonds several years ahead of par call dates. Low absolute yields, combined with the Treasury curve’s bull flattening, afforded issuers very low negative arbitrage (i.e., the difference between escrow earnings and borrowing rates until the call date) that can be dwarfed by the cost savings of replacing 5 percent coupons on tax-exempt bonds with borrowing rates near 3 percent.
The momentum of this supply phenomenon has broadened the municipal demand base and supported a bullish backdrop for the tax-exempt market, particularly for bonds with shorter call dates. The series of favorable technical factors throughout the year has helped push credit spreads to the tightest levels in the past decade. Meanwhile, state and local governments’ debt and unfunded pension liabilities has remained above 400 percent of tax revenues since the last recession. We believe this cognitive dissonance provides an opportunity to forgo very marginal carry in order to be selective and move up significantly in credit quality.
Unfunded Pension Liabilities Outweigh Tax Revenues by 400%
State and local governments’ debt and unfunded pension liabilities has remained above 400 percent of tax revenues since the last recession.
Source: Guggenheim Investments, U.S. Bureau of Economic Analysis, Federal Reserve. Data as of 3.31.2019.
—James Pass, Senior Managing Director; Allen Li, CFA, Managing Director; Michael Park, Vice President
Important Notices and Disclosures
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
VIDEO
Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share their outlook for the first quarter 2021.
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 12.31.2020 and includes leverage of $13.7bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
This is not an offer to sell nor a solicitation of an offer to buy the securities herein. GCIF 2019 and GCIF 2016 T are closed for new investments.
©
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as
Institutional Investors. To change this, update your
preferences.
United States Important Legal Information
By confirming below that you are an Institutional Investor, you will gain access to information on this website (the “Website”) that is intended exclusively for Institutional Investors and, as such, the information should not be relied upon by individual investors. This Website and any product, content, information, tools or services provided or available through the Website (collectively, the “Services”) are provided to Institutional Investors for informational purposes only and do not constitute a recommendation to buy or sell any security or fund interest. Nothing on the Website shall be considered a solicitation for the offering of any investment product or service to any person in any jurisdiction where such solicitation or offering may not lawfully be made. By accessing this Website, you expressly acknowledge and agree that the Website and the Services provided on or through the Website are provided on an as is/as available basis, and except as partnered by law, neither Guggenheim Investments and it parents, subsidiaries and affiliates nor any third party has any responsibility to maintain the website or the Services offered on or through the Website or to supply corrections or updates for the same. You understand that the information provided on this Website is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. You also agree that the terms provided herein with respect to the access and use of the Website are supplemental to and shall not void or modify the Terms of Use in effect for the Website. The information on this Website is solely intended for use by Institutional Investors as defined below: banks, savings and loan associations, insurance companies, and registered investment companies; registered investment advisers; individual investors and other entities with total assets of at least $50 million; governmental entities; employee benefit (retirement) plans, or multiple employee benefit plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; member firms or registered person of such a member; or person(s) acting solely on behalf of any such Institutional Investor.
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”