FINSUM + Magnifi: Bank of America Warns Investors of Bond Market Correction
April 23, 2021
After a consistent rise in yields in late February and March rates are finally falling as the 10-year
treasury yield sits just over 1.5%. This is mainly coming from the fact that markets are softening to
the recovery and at peace with above-average growth and steering towards full employment by
2022. However, economists at Jefferies are predicting faster growth and lower unemployment
and markets having to re-adjust. This means spikes in 3 and 5-year T-bill yields. Deutsche Bank is
taking a leaning toward a different scenario. Where the Fed outpaces the economy, it is causing too
much wage inflation and causing higher unemployment and sinking yields. Bank of America
likewise warned that the recent fall in yields was not sustainable and the trend will be higher.
Income investors will want to keep their eyes on economic data to see which scenario is playing
out in real-time.
FINSUM + Magnifi: Look Out for a Big U-Turn in the Muni Market
(March 2021)
Even before the pandemic and subsequent crisis, the high-yield Muni market failed to deliver the returns after taxes that the corporate bond market did despite most being tax-exempt for investors. However, David Hammer, Exec Vice President of Pimco sees a different direction for muni's moving forward. Hammer says he sees high-yield muni’s value on the rise as tax collection holding increased in 2020 and a perception of less risk in muni’s. Hammer helps run Pimco’s High Yield Muni Bond fund (PHMIX), which has generated a 5-year annual return of 5.82% and ranks among the top 10% for its Morningstar category. PYMAX is another Pimco muni fund that has a lower $1,000 minimum investment. Hammer says he looks for bonds that are “resilient and have secured cash flows, and we can expect spreads to compress further.” Modern high-yield bonds aren’t all funding local governments; many are profitable private companies that are making public goods, such as airlines.
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FINSUM + Magnifi: Surging Muni Demand Threatens Returns
(February 2021)
Municipal bond market returns remain low, but nonetheless investors seem willing to keep demanding low yield munis. This rise in demand has pushed the 10-year muni-treasury spread to -50 basis points. This comes after last March when muni’s were not only higher than the 10-year treasury but 300% of the 10-year t-bill. Part of what is driving the municipal bond market so low is a $12.5 billion dollar influx in muni mutual funds in January alone. The supply side of the market is also affecting rates as issuance slowed in the market. Munis usually provide tax relief for many investors but members of BlackRock’s municipal group said the share of taxable muni’s “remained elevated” at 29%. The group also expects these trends to continue in this segment of the bond market.
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FINSUM + Magnifi: Munis Still Look Attractive
(January 2021)
Advisors don’t need to be told that rates are at ultra-low levels. Yet despite this, munis are still maintaining their attractiveness. Muni issuance was at a recent high in 2020 (the highest level since 2013) with $3.9 tn outstanding. The reason why is that many municipalities have been seeing budget shortfalls because of COVID. Despite the big jump in issuance, demand has kept pace, with investors gobbling up as much as municipalities can issue. Demand has started well this year too, with muni ETFs seeing gains.
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