Municipal bonds have regained their safe haven status as volatility returns to the stock and bond markets. They have also been getting a boost from yield-starved, go-anywhere overseas investors, said Robert Amodeo, portfolio manager for Western Asset Management. “Overseas investors are looking for yield in liquid, stable markets and muni investors should take that as a vote of confidence,” said Amodeo. Amodeo oversees the Western Asset Managed Municipals Fund which is up 4.1% thus far in 2016, according to Morningstar. The $5.2 billion fund has returned an average of 6.8% annually over the past three years, putting it the 47th percentile in Morningstar’s national municipal bond category. The trailing 12 month yield on the fund is 3.7%, according to Morningstar. The Barclays Municipal Index reported returns of 4.5% year-to-date for the market. This represents about 14 consecutive months of positive total returns for municipal bond investors. Year-to-date issuance, at the end of August, was roughly $267 billion, which is the same versus the same period during 2015. New financing is up 11% to date while refunding is down 3%, according to Amodeo. On the demand side, Municipal bond open end mutual funds have posted very strong inflows so far this year. Year-to-date inflows now stand at $45 billion, marking 49 straight weeks of inflows. This is not unexpected given relatively low interest rate volatility, and the steady returns for municipal bonds. And as for the tax reform rhetoric coming from the campaign trail? “Tax reform is a key issue but we are going to dismiss the rhetoric and wait for details to surface after the election is over,” said Amodeo. Amodeo is also not overly concerned about high profile credit problems like Puerto Rico becoming a catalyst for broader contagion. “Their challenges are not new information and mostly priced into the respective securities,” said Amodeo. “All these stories are consistent with our expectation that general obligation bond ratings are likely to remain under pressure and underperform revenue bonds.”
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