The Advisor Institute: Coach's Corner
Finding value in munis today

Practical messages intended to help you elevate the success of your practice.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By David RichmanNational Director, Eaton Vance Advisor Institute

      The pandemic has many investors confused on a wide range of investment topics. For some clarity on implications and opportunities today in the land of munis we turned to Adam Weigold, senior portfolio manager on Eaton Vance's municipal bond team.

      Remember our thinking on thesis articulation — timely, pithy, sound bites that connect the dots to the strategies you have embraced with your clients. Below are excerpts from our conversation with Adam with his thesis statements in bold.

      David: "Adam, are municipals overbought?"

      Adam: "Parts of the municipal market are overbought. We've seen demand heavily outweigh supply in the municipal market on the whole, pushing muni relative value to historically rich levels. Nonetheless, given a positive economic recovery outlook, we think certain muni sectors are poised to outperform."

      David: "What has the pandemic done to states and municipalities?"

      Adam: "Coming into the crisis, most states had relatively strong financial health. The impact of the pandemic has been uneven. States exposed to travel and tourism suffered the most, along with states with heavier energy-related economic exposure. Most states, however, saw negligible revenue reductions, and some places, like the state of California, saw double-digit revenue growth. Actually, we believe most states will come out of the crisis in reasonable shape. Any additional stimulus money from the federal government will just be an added bonus.

      David: "As we move into an economic recovery scenario, let's talk about your outlook for some of your favorite sectors. First, hospitals?"

      Adam: "A lack of non-COVID-19 traffic stressed hospital balance sheets. Aid from the federal government has largely negated losses from COVID-19-related expenses, and we are seeing a robust resurgence of elective procedures. Although the average muni buyer has been reluctant to wade back into the hospital sector, with the appropriate credit research, we see value in tax-exempt bonds issued by hospitals.

      David: "Second, senior living facilities?"

      Adam: "Senior living facilities were perhaps the hardest hit sector in the municipal market, leading the market in a number of municipal defaults over the past six months. Credit spreads widened significantly and — unlike many other municipal credit sectors — have not returned to normalized levels. The nursing home sector is 'unloved' yet ripe with opportunity for higher yield and total return."

      David: "Third, airports?"

      Adam: "Airports have traditionally been one of the most well capitalized, highest-rated sectors in the market. Many bonds issued on behalf of airports are backed by lease payments from airlines who use their gates and terminals. While COVID-19 brought air travel to a halt, these payments continued and we expect air travel to pick up in the latter part of the year. Many high-quality airport bonds saw their prices cut and spreads increase. We believe select airport bonds are a buying opportunity.

      David: "What are you thinking about today's credit spreads?"

      Adam: "We look at credit spreads across sectors, rating categories and maturities. High-grade credit spreads (AA and A) have largely normalized, partly due to the large flows from buyers looking for high-grade munis. As you move down the credit curve, spreads remain historically attractive."

      "We have set up parts of our portfolios as COVID-19 recovery plays, where we added health care, senior living, airports, higher education and transportation bonds. We think spreads in these sectors will tighten to historical levels as we move toward an economic recovery."

      David: "What is the sweetest spot on the yield curve?"

      Adam: "The Fed's foot is firmly on the front end of the yield curve, so we think we will see a steepening of the Treasury and muni curve as overall rates rise. Given the paucity of yield in the front end of the muni yield curve, the middle of the yield curve seems to make the most sense. Bonds maturing between 7 and 15 years would appear to have the best mix of income without too much exposure to rising rates out on the long end of a steepening curve."

      David: "Finally, what should a more traditional municipal investor be most concerned about?"

      Adam: "Be careful ... the municipal market is a fickle market and does not respond well to rapid upward movements in interest rates. We would be watchful of inflows and outflows as well as rising rates caused by perceptions of increased inflation.

      Bottom line: This is your time to develop and articulate theses to bring clarity to your client conversations, amp up clients' conviction in you and capture referable moments.

      All investing involves risk including the risk of loss.

      At the Advisor Institute, our goal is not to shape your opinion or provide investment advice, rather to share this viewpoint as an example of what we believe to be a superb display of thesis articulation.