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Municipal and corporate bonds may help to weather the storm

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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 James H. Evans, CFAChief Investment Officer, Fixed Income, Parametric

      New York - Covid-19 has caused substantial upheaval in the financial markets. Municipal and corporate bonds have not been immune. Last week, outside of Treasuries, all fixed income markets had bouts of illiquidity and significant underperformance versus Treasuries. As of this morning, bonds have wide bid/offer spreads, and they will likely have wide spreads and be volatile for the entire week.

      The investment grade markets stabilized on Thursday after the US Federal Reserve (Fed) Bank announced it would provide $1.5 trillion of short-term loans to banks in return for Treasuries.

      Over the weekend before world markets opened on Sunday, the Fed cut interest rates by a further 100 basis points (bps), bringing the target federal funds rate to the 0 to 25 bps range for the first time since 2015.

      For the week, 2, 5, 10 and 30 year municipal yields rose 62 bps, 76 bps, 80 bps and 83bps, respectively. Below is a table showing the spot yields as of March 13, 2020 on A-rated municipals, valuations versus Treasuries and valuations versus A-rated corporates. It also shows the average valuations from 2019. Municipals appear attractive to us across the board.

      Municipal valuation dashboard

      MunicipalValuationDashboard0313

      Source: Bloomberg as of March 13, 2020. *Tax-equivalent yield (TEY) assumes tax rate of 40.8%, calculated as tax-free yield/(1 - 0.408).

      Likewise, corporate bonds had a significant selloff last week, with yields in the 2, 5, 10 and 30 year rising 53bps, 63bps, 64bps and 73bps respectively. Corporate bonds relative to Treasuries also seem to be very attractive.

      Corporate valuation dashboard

      CorporateValuationDashboard0313

      Source: Bloomberg as of March 13, 2020.

      While this turmoil persists, we see these factors as supporting investment grade municipals and corporates:

      • We expect Treasury yields to be low and close to zero for quite some time.
      • We view investment grade municipals and corporate yields as attractively valued.
      • We anticipate further unprecedented fiscal and monetary support from the US government and the Fed to support municipalities and corporations.

      Bottom line: As a result, we believe investment grade municipal and corporate bonds could weather this storm better, helping to provide more attractive income and return opportunities relative to comparable maturity Treasuries. In our view, professional credit oversight will be very important going forward to assist with avoiding deteriorating credits.