Municipal Bond investment managers are suggesting that there are 4 reasons why Municipal Bonds could now lift off.
1. Outperformance Often Prevails After Underperformance
Following 39 of the 40 negative 12-month rolling periods for the Bloomberg Municipal Bond Index, subsequent 12-month returns were not only positive, they were abnormally strong, with an average of 14.70%.
2. A Rare Sell-Off in 2022 That May Moderate
The Bloomberg Municipal Bond Index Yield is now just shy of it's 10 year high, having suffered heavy net outflows as a result of the Fed Pivot, rising inflation and the uncertainty surrounding the Russia-Ukraine crisis.
Volumes out for bid in April reached a high for the year, whilst YTD new issuance is on track to outpace the record set in 2020.
Yet looking at the past 6 sell-offs since 2006, the current duration of 16 weeks surpasses the average of 12 weeks. Coupling decelerating seasonal issuance with the upcoming summer redemption period, the demand for municipal bonds is likely to increase and may bring the sell-off to conclusion.
3. Valuations Attractive for Currency Hedged European Investors
For European Investors, the potential yield pick up of taxable Munis on a currency hedged basis is around 125 bps over AA euro sovereign debt and 80 bps over European Corporate debt. A relatively interesting differential.
4. Fundamentals Getting Stronger
Moody’s, S&P and Fitch have upgraded 10 times more par than was downgraded YTD, reflecting robust revenue collections and record cash balances. And with multiple stimulus programmes from the US Federal Government (E.g the American Rescue Plan (ARP), fundamentals are likely to continue to strengthen. For example, credit quality improvements at airports as a result of increasing passenger traffic trends has received a lot of attention, with the top 5 busiest airports globally in 2021 all being US domiciled.
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