Here’s why long-term munis could be a smart addition to your investment strategy.
Transcript:
CAROLINE WOODS: Joining me now is Bill Roach, portfolio manager and senior trader at Macquarie Asset management. Bill, Thanks so much for being here.
BILL ROACH: Thanks for having me.
CAROLINE WOODS: So Bill, we’re talking fixed income with stocks near record highs. The S&P 500 is up what 10% year to date. Why should investors be paying attention to bonds specifically municipal bonds right now?
BILL ROACH: Yeah I think municipal bonds offer a really unique opportunity in the market right now. I think specifically for munis. The longer end of the curve looks very attractive. A lot of people probably have taken note that, the Fed is likely to hike. Treasury rates have fallen on the front end. Munis have experienced the same thing. The difference in munis has been that due to some technical factors, our long end is actually up about 50 basis points in yield. Year to date. So and relative value to treasuries, which produces a lot of opportunity for high level tax exempt income. And when you do take that tax exemption from munis into account you’re looking at yields that are in the high single digits, which is really know, compelling case for total return.
CAROLINE WOODS: Yeah because that’s the thing with Muni bonds, I feel like they’re often pitched as tax free income. So are they as really as good of a deal as they seem right now. I mean, high single digit yields is not necessarily what the S&P is returning, but it’s higher than a lot of bonds and it’s higher than a savings account.
BILL ROACH: Yeah I think there really is compelling value there. And I think, you know, it’s in the context of what’s going on the fundamental side, which has been broadly good performance from state and local governments. And issuers in our marketplace with, you know, fundamentals in good shape. And really the dislocation has been driven by technical factors. We’re experiencing higher than usual supply on pace to be about $400 billion as of the end of this week, which is on pace to be a record year. So far. And really, the demand has been focused into particular areas of the marketplace. We’re seeing about $25 billion in flows so far this year. 7 billion coming into mutual funds and the bulk of which 75% or so has come into ETFs. And that ETF flow has really been concentrated in high grade and has been concentrated about half of it, you know, towards the shorter dated maturities, which has led that part of the market that kind of outperformed and caused sort of underperformance in the longer end, which, again, I think when you look at the tax exempt yields and the fact that it’s a kind of a technical disruption and not a fundamental disruption, the opportunity really is a pretty good one right now.
CAROLINE WOODS: You mentioned the Fed. How much does the Fed’s September meeting matter for munis? The expectation is that the Fed will cut by at least 25 basis points. There are calls for what? Two to three cuts this year. Does that make munis more attractive, attractive or less attractive.
BILL ROACH: Yeah, I think there’s kind of two sides to that answer. One is, you know, if you look at shorter dated treasuries, money markets, you mentioned savings accounts. You know, as the Fed does cut there’s reinvestment risk there, right. The shorter dated investments are going to go down in yield, and you’re going to be able to lock in those rates. And I think folks are experiencing that this year who might have bought, you know, one or two year CDs over the last few years or money markets, and they’ve enjoyed that income in the front end. And that’s been a great opportunity and a great place to be. I mentioned moving up the curve. You know, munis are a longer dated asset class. You look at the typical kind of Muni financing deal, and 75, 80% of those bonds will come on the long end 15 or 20 years out. And that’s, like I said, from a technical perspective, cheapened up quite a bit and offering really attractive yields. So I think for the Muni market, certainly we welcome some Fed cuts. But in the bigger picture for a lot of the marketplace, which is longer dated, it has more to do with what the longer end of the Treasury curve is doing. And as we’ve seen, getting a little bit of, you know, assurance that the Fed will cut is helpful. But, you know, moderating growth will help the long end and should help munis as well. And I think, you know, there’s a lot of technical factors within the Muni market, like continued demand and a little bit less supply that could push Muni long end yields down as well.
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