Advisory Blog
Our thoughts on what the muni market means for the long-term investor

Timely insights on the issues that matter most to investors.

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.

  • All Posts
  • More
    Topics
      Authors

      Filter Insights by Date:   Start Date   End Date   or  Show recent results
      The article below is presented as a single post. Click here to view all posts.

      By Christopher J. Harshman, CFADirector, Portfolio Management, Parametric

      New York - Not since 2008 have financial markets witnessed the level of volatility that is now coursing through nearly every asset class. In municipal bonds, after a strong start to the year, early March brought dislocation from Treasuries amid a market-wide flight to safety as global health concerns continued to escalate.

      High-yield muni mutual funds in particular have seen large redemptions, prompting aggressive selling into light liquidity. This is reminiscent of 2008, when even high-quality assets were sold as investors wanted to move to cash. And again, the result has been rapidly falling prices and rising yields, as the market seeks to find its footing. While there may indeed be longer-term credit considerations, the current liquidity crunch is technical in nature and is pressuring valuations.

      What we believe could end this cycle would be a combination of reduced selling pressure and an increase in retail investor demand, which would be likely spurred by high quality assets at fire sale prices and yields. Yields on high quality municipal bonds, relative to yields on US Treasury bonds, are now at unprecedented levels. The chart below shows how yields have risen since the recent low of March 6, and how the ratio of benchmark AAA muni yields / US Treasury yields has risen as well.

      High-quality muni yields reaching unprecedented levels

      Yielddata0323

      Source: Thomson Reuters and Bloomberg LLP as of March 20, 2020.

      Despite the Fed taking action to stabilize money market funds last week, tax-exempt variable rate demand notes (VRDNs) benchmarked to the SIFMA rate (akin to LIBOR linked securities in the corporate market) have seen yields rise rapidly to historic levels. Again, this reflects the current lack of demand strained liquidity in the muni market.

      For longer dated AAA fixed-rate municipal bonds, isolating the 10-year yield ratio over the last 30 years (10y AAA municipal bond yield / 10y US Treasury yield) the graph below puts the current market environment in context.

      Current muni market environment in historical context

      10yRatio0323small

      Source: Thomson Reuters and Bloomberg LLP as of March 20, 2020.

      It is important to note that we believe the current volatility may persist. However, history shows us that extreme distortions in municipal valuations over the short term may give long term investors a compelling entry point.

      We believe there are two primary considerations for investors at this time. The first is the market dislocation resulting from fear and uncertainty, leading to reduced market liquidity and high volatility. The second is the fundamental credit concern about the severity and duration of this health crisis and the ultimate long-term effects on the economy.

      We see potential opportunity in the volatility. We believe the economy will recover. In municipals, many individual sectors will have unique considerations, but in general, we believe high quality issuers should weather the storm. We will discuss the credit quality effects of the crisis in a forthcoming blog post later this week.

      Bottom line: Overall, we are encouraged that once the dust settles, an unprecedented amount of coordinated fiscal stimulus stands ready to restart the global economic engine. The short term may indeed bring more volatility, but investors could use the current environment to set the foundation for future positive investment outcomes with municipal bonds.