The Latest in the Municipal Bond Market

Nicholas J. Foley

Senior Portfolio Manager
Bloomberg TV Interviews Nick Foley

In an interview with Taylor Riggs on Bloomberg Markets, Senior Portfolio Manager Nick Foley discusses the impact of legislation, credit quality, yields, liquidity, and fund flows in the municipal bond market.

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(Taylor Riggs) As we’ve been reporting in the last hour, House Speaker Nancy Pelosi and Senate Democratic leader Chuck Schumer are throwing their support behind the $908 billion bipartisan proposal as the base for negotiations. Joining us now to discuss all of this and the impact on state local government budgets, Nick Foley, senior portfolio manager for fixed income with Segall Bryant & Hamill.

Nick, great to have you, and I am curious, assuming we don’t get stimulus for another few months or so, what pressure does that put on the stress and the credits of some of the state and local governments that you’re looking at?

(Nick Foley) Yeah, that’s a great question. I know it’s been top of mind for a lot of investors, you know, a lot of our investors as well. You know, we take maybe a little bit different look at it, from the sense that we don’t really, we haven’t gotten enough details from any of these proposals to really be making any meaningful buy and sell decisions. And so, we’d probably wait to see obviously how that money’s going to flow through either a state, local, city level, and how the money’s allocated. So you know, what we’ve seen is really that these credits that were doing very well pre-COVID have managed very well through COVID, and the credits that were doing very poorly pre-COVID, you know, Illinois, MTA, New Jersey have obviously been the ones that have had the highest degree of financial stress. So you know, the thing we really hit on too is that, you know, there are 70,000 individual issuers in the municipal bond market that are backed by a wide array of tax revenue streams. And so, while it makes the market really complex, it makes it really opaque. It also makes it, you can be really highly selective in which tax revenues you’re looking at, and you want your bonds backed by.

(Riggs) And sticking with some of the credits, it’s interesting. High yield performance has really caught up with some of the investment grade bonds really through the summer. Does high yield then still look attractive? Can you assume further spread compression?

(Foley) Yeah, I certainly think it’s possible. We’ve reached such a low point in rates, and credit spreads have compressed so tightly in investment grade that I could see possibly some additional high yield compression. I think what’s really interesting about the high yield market is that, you know, it’s had a fantastic run over the last decade, obviously better performance, more flows, more people buying high yield bonds, which increases performance, kind of that virtuous cycle. But you know, we’re reaching this point where nominal yields are so low, and prices are so high that if we get into any really serious fiscal stress with any of the individual credits, or we get back to a point like we were in March with really serious bouts of illiquidity, you know, who’s going to be the marginal buyer of that debt? You know, we know that investment grade bonds, you know, state of Massachusetts GOs, there’s always going to be plenty of taxable buyers that want to step in, are willing to step in to buy those at some spread to treasuries. But you know, the high yield market is so different from the taxable high yield market that, yeah, it’ll be interesting to see if people kind of pick up on that, and if fiscal stress really continues to push on that market.

(Riggs) And with some of those fund flows that you’ve been tracking, are the retail investors still very much involved, or do you expect some seasonality and some outflows around some of the headlines?

(Foley) Yeah, we’re seeing, we’re continuing to see strong, strong inflows, continuing to see strong inflows, I guess, I would say expected probably through the year into January. We have this really odd technical cycle in the municipal market where through December and January issuances and supply is so low that generally you get just a lot of people chasing a very small number of bonds. And so, that’s certainly what we’re seeing now. I think as rates stay stable, or range-bound at least, we’ll continue to see fairly strong inflows to munis, as on an after-tax basis, they still look very attractive, versus any other investment grade bonds.

(Riggs) And you’re kind of leading me into my next question. We were joking yesterday that we’re finally getting a 1% yield on the treasury. We’re getting close to it. If you take a look at an AAA muni on the Bloomberg Terminal and it’s only 70 basis points, is that enough to get you excited, or could further yield backup present a more attractive entry point?

(Foley) Yeah, I would certainly say we’ve reached a point. You know, we look at a muni to treasury ratios across the curves. So, the five-, 10-, 30-year, and what percent of the yield versus the comparable treasury that is. And we’re reaching a point now where in the five-, 10-, and 30- year part of the curve, we’re reaching lows and points that we would start to say, you know, munis are fairly valued, if not overvalued. So, I’m interested to see if, obviously, treasuries are ticking higher the last few days. Munis have stayed flat, if not even lowered slightly. So, will be interesting to see if those treasury rates hold, if that starts to push on the muni market yields as well.

(Riggs) Fairly valued, if not overvalued. I think I’ve heard that in every asset class. Nick Foley of Segall Bryant & Hamill, really appreciate your time.

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Investing in the fund involves risk, including loss of principal. | The Segall Bryant & Hamill Municipal Opportunities Fund invests primarily in instruments issued by or on behalf of different states. A portion of income may be subject to the alternative minimum tax. | Investments in municipal bonds are subject to interest rate risk, or the risk that the bonds will decline in value because of changes in market interest rates.

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The Segall Bryant & Hamill Municipal Opportunities Fund is distributed by Ultimus Fund Distributors, LLC.

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