Sky-high yields and stellar credit make Muni bonds a buy, investors say

Amid a historically difficult year in the $4 trillion municipal bond market, investment managers see plenty of opportunity as soaring yields provide an attractive entry point.

Yields on benchmark ten-year municipal bonds are hovering around 3.23%, the highest since 2011, while 30-year munis are yielding more than comparable US Treasury debt. These prices open the door for investors seeking income in a market where many state and local governments are teeming with cash, said Sylvia Yeh, co-head of municipal fixed income at Goldman Sachs Asset Management and Brian Barney, managing director of institutional portfolio management. and trading at Parametric Portfolio Associates, during a Bloomberg muni market roundtable on Tuesday.

Conversations with customers are now “almost entirely opportunistic,” Barney said. “In times of volatility and attractive rates, it would be a good time to enter.”

Still, municipal bonds are down about 12% since January, on track for the worst year of performance since at least the 1980s, according to Bloomberg indices. And the Federal Reserve is expected to keep raising interest rates to stifle inflation, which means there’s likely more pain to come.

In the following Q&A, shortened for clarity and brevity, investors share their takeaways from 2022 and how they preview what next year could hold.

Which sectors do you like in this market environment?
Yeh gave a one-word answer when asked where she sees opportunity in the muni bond market these days.

“Everywhere,” she said, noting that there are “interesting” purchases of high-yield debt when her team is comfortable with credit fundamentals. On the other hand, “you can buy high-quality names pretty cheap with a spread, which you would want to do all day on the top and bottom of the curve,” she said.

Health care bonds are becoming attractive even as hospitals grapple with staffing costs and the pandemic aid sunset, Barney said.

“There are definitely going to be problems in this sector, and so having a credit research team, like we do, can help find out what the most attractive spreads are from a year ago,” said- he declared. “So it’s a sector where there are risks but opportunities.”

Is there anything you don’t like right now?
“We love everything at a price,” Yeh said. “When spreads were so tight, like they were last year, we might not be playing as much in project finance. But now that we’re starting to see some of the construction risk materialize, spreads are widening and some trades are being broken up, they’re getting more attractive at certain prices, they’re being valued where they should be.

How do you manage the lack of liquidity in the market?
In recent years, dealers have been more risk averse, keeping their inventories of municipal bonds low, leading to lower liquidity, a trend the market is facing, according to Barney.

“It’s like we’re numb to this year, and lack of cash is the new normal,” he said. There have been “more algo bidders, more players in the odd lot space. This liquidity would surprise you, it is more important than you think.

Robert D. Coleman