The Barclay’s Municipal Bonds Index is up around 4% year-to-date, yet it has been drifting lower as bonds have sold off in the past month sending yields higher. John Dillon, managing director at Morgan Stanley Wealth Management , said investors need not panic because munis will hold onto their gains. “Although the bond market will ebb and flow with every non-farm payrolls report and Fedspeak, the Morgan Stanley year-end forecast for the 10-year U.S. Treasury note is just 1.25%, almost 50 basis points lower than today,” said Dillon. “And our U.S. GDP forecasts are below consensus too, so even if we don’t get down to that 1.25% level, it seems unlikely that we will move materially higher in yield from current levels.” In the interim, Dillon said he views the weakness as a buying opportunity. Based on the historic seasonality of the muni market and according to ICE Data Services, Dillon expects the amount of bond redemptions to decline significantly during September, October and November, which is actually expected to be the lowest month of this year. “When the uptick in supply is paired with weaker reinvestment demand, relative value should be unlocked, meaning cheaper munis and often a good entry point,” said Dillon. A few months ago Puerto Rico’s problems were on the tip of every muni investor’s tongue, but lately it has been very quiet on the Puerto Rico front. Dillon said the PROMESA bill put before the President by Congress, which was passed and signed into law before one of the largest defaults, actually has had a “mildly positive impact on the overall market” even though the defaults continued. “Concerns over Puerto Rico did not have a systemic impact on the muni market despite the high profile coverage of the defaults,” said Dillon. “I view that development very positively, as it shows that muni market is moving more toward an idiosyncratic, credit-based focus, where participants can ring-fence a problem issuer even a large one.” As for the election’s impact on the muni market, Dillon said he is
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