Chris Roberti, Managing Director, Chief Marketing Officer moderates a conversation with David Dowden, Managing Director and Portfolio Manager and Megha Shrimal, Associate Director and Client Portfolio Manager, to discuss MacKay Municipal Managers’ insights on the municipal bond market.
Municipal bonds have demonstrated resilience throughout 2021 so far. “Demand has been very strong, when you look at mutual fund flows. Clearly, when a new deal comes to the marketplace today, it is not uncommon to have a municipal bond deal that’s anywhere from 25-30 times oversubscribed,” says Roberti.
Municipals can provide attractive yields, and are very attractive when compared to other fixed-income asset classes, even going back as far as 2010. “The only other asset class that’s out-yielding taxable munis during this time frame is high yield, which would be expected. Compared to corporates, we’re picking up incremental yield, while picking up a full ratings category, which is very appealing to investors,” says Shrimal.
While the muni market is a fixed-income asset class and thus subject to changes in interest rates, alpha generation is independent of interest rate movement. “The market can be rising or falling, and alpha generating opportunities arise,” says Dowden.
These investments are repeatable on a high-frequency basis, which means that these trades occur on a nearly daily basis. “The municipal bond market, which for many investors brings to mind the notion of collecting tax-exempt interest and not much more, is actually the perfect market and the final frontier for finding a market where alpha-generation is possible on a relatively-consistent basis,” says Dowden.
The variety of coupon structures and call structures, and the growing use of forward delivery securities, have made pricing difficult for investors. These structural intricacies invite opportunities for mispricings and mis-valuations in the market, which experienced investors can take advantage of their knowledge to generate alpha. As the market has become less liquid and more volatile, active management has become paramount to a successful portfolio.
Additionally, awareness of liquidity in a portfolio is crucial for risk management. The sheer level and velocity of flows has led many investors to stop pricing risk-appropriately or to misunderstand the importance of liquidity.
Dowden stresses the importance of accepting the trade-off between losing basis points of income today, rather than losing many more basis points of income over time if the portfolio is less liquid than expected. The rounds of financial stimulus as a response to COVID-related economic changes have been a significant tailwind for municipal markets, from a credit profile point of view.
To track updates like this on municipal markets, MacKay Municipal Managers offers insights into the municipal marketplace on their proprietary Muni 360 platform, at www.muni360.com.
MacKay Municipal Managers runs just over $75 billion in assets under management and has been a part of New York Life Investments for twelve years. MacKay Municipal Managers differentiates itself from other managers through its proficiency in active management, and the firm is driven by an alpha focus, credit specialization, and the expertise of a team that averages 25+ years
To learn more, catch the replay of New York Life Investment’s recent webcast: Resiliency & the municipal markets: 2021 Mid-year update & insights.
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