The Latest in the Municipal Bond Market
Bloomberg TV Interviews Nick Foley, March 16, 2021
In an interview with Taylor Riggs on Bloomberg Markets, Senior Portfolio Manager Nick Foley discusses rates, Treasuries, and his views on economic stimulus and state aid as they relate to the municipal bond market.
(Taylor Riggs) Joining us to discuss, Nick Foley, Senior Portfolio Manager for Fixed Income at Segall, Bryant and Hamill. Nick, curve ball. We’ve had a few people, Ray Dalio, say cash and bonds are trash. Bill Gross, just 20 minutes ago on this program, saying he’s shorting treasuries, bonds are trash.
Broadly speaking, is it wrong to be a buyer of bonds at these levels, given inflation expectations?
(Nick Foley) Yeah, I’m not sure I totally agree with that. I’m probably a little bit biased, but I think one point that people forget is that, you know, as rates actually tick up, the income in your portfolio is ticking up as well. And so, you know, as you think about it over a longer term time horizon, your income is actually increasing and that income can offset interest rate moves as well. And so I certainly don’t think they’re trash. You know, we’ve seen this repeated a couple times. You know, I remember back in 2010 when everyone talked about Bond Armageddon and we had a really nice decade for fixed income. So I’m not sure I totally agree with that.
(Riggs) Have you seen a taper tantrum in the muni market? How painful has the recent sell-off been for your world of munis?
(Foley) Yeah, it really hasn’t. So, munis have actually really outperformed most fixed income instruments this year. You know, I’ve seen a couple of articles that have said that municipal bonds can provide this safe haven or this buffer from interest rates. And so far this year, they have done that. But I do have a little bit of concern as I think in past episodes when I provided that buffer, you know, muni to treasury ratios were much cheaper than they are now and municipal credit spreads were much, much wider. And so I would say we’re at this point where munis have really outperformed. But when you think about why munis have outperformed, you know we’re looking at very, very stretched valuation. So, you know, if we do see a lag higher in treasury rates, you could see munis underperform for a bit.
(Riggs) We started this segment talking about state and local governments rushing to issue debt, 30-day supply now the highest since November to take advantage of rates before they go higher. Are you worried, though, about the reasons why they are rushing to issue debt?
(Foley) Yeah, that’s always the tricky part about the bond market is all the issuers want to issue debt when it’s cheapest to them and richest, obviously, to the buyers. But I would say right now we do have some concerns just about the ratios we’re currently at. It’ll be interesting to see, I believe this week, where we’re finally seeing a real bulk of supply, like you pointed out. Just if we do start to get a break in those muni to treasury ratios, and if they do widen out a bit. I think, however, if we do get a significant break and they do move higher, it could create a real opportunity as, you know, the other dynamic we’re looking at in the municipal market is obviously what’s going on with taxes. So, that seems to be an extremely strong tailwind. I always joke that municipal bonds have the best long-term tailwind out there, which is higher tax rates. And, you know, we’re starting to see some glimpses of that, I would say.
(Riggs) Muni jokes always allowed on this program. Let’s talk more just about the stimulus bill, $360 billion. I was listening to one Republican Senator, I think who said, effectively they’ve made New York whole. I mean, they’ve paid off a lot of these big state and local government budgets. How are you thinking about the credits that benefit from the stimulus?
(Foley) Yeah, it’s, you know I think so many large numbers are being thrown around these days, with all these stimulus packages, that you can almost lose just how big of a stimulus package this is to municipal-centric credits. You know, the headline number is about 325 billion going to state and local credits. But as we dig into the package, we see that it’s actually somewhere closer to about 650 billion going to municipal-centric credits. That combined with the last two phases of stimulus brings total federal stimulus to municipal-centric credits to about $1.2 trillion. You know, as you pointed out, we’ve seen analysis that this most recent stimulus package is actually five times what the expected budget gap was going to be through 2022. So we’re talking about, I mean, a staggering amount of money flowing into these credits and it definitely has to change your calculus and how you’re looking at municipal credits for the next couple of years.
(Riggs) Nick Foley, of Segall Bryant & Hamill. Thank you, as always, for your time.
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