Increasing yields at the front end of the municipal curve during the first six weeks of 2022 may present a more attractive entry point for fixed income investors who were hesitant to invest during 2021.
Due to heightened market anticipation of future Federal Reserve (Fed) interest rate increases, municipal bond yields, as represented by Bloomberg indices, particularly in the 2- to 7-year segment of the curve, have risen year-to-date. In addition to reacting to rising U.S. Treasury rates, municipals have been pressured by nearly $6 billion in year-to-date cumulative outflows from investment grade municipal bond funds, per the Investment Company Institute, as retail investors sell into the rising rate cycle. The result is better absolute value in the form of increased yields and improved relative value, which means higher Municipal/Treasury (M/T) ratios.
With higher yields, negative near-term price declines due to rising rates should be increasingly offset in the longer-term. In addition, we believe the municipal credit environment remains favorable, as bond issuers across many municipal market sectors put cash from government stimulus programs to work. Our long-term outlook for municipal technicals also is positive. Finally, from a higher-level portfolio strategy view, a municipal allocation could help with risk diversification, as an offset to potentially fully-valued risk assets.
Given the current conditions, with many investment grade bonds providing a higher level of income than cash, our positive long-term technical outlook, and potential portfolio diversification benefits, short- and limited-term municipal allocations could provide risk-averse clients with a more attractive entry point to establish a position in the space.*
Breckinridge Market Monitor is a periodic assessment of market conditions published as economic or market conditions warrant for the benefit of advisors, their clients and institutional investors.
*Both cash and bonds are subject to interest rate risks. Bonds are subject to other risks, including the loss of principal. Additional information about our strategies and the risks associated with each are available in our Form ADV Part 2A, which is available from our website or by contacting our consultant relations team at email@example.com.
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