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Published on Aug 23, 2016
Now
that negative yields have become a reality, municipal bonds are more
critical than ever for income seeking investors, said Jeff MacDonald,
director of fixed income strategies at Fiduciary Trust Company
International. 'Munis not only compare favorably to the negative yields
now being offered by almost a dozen developed markets, but also against
most sovereign bonds in positive territory, especially when viewed on a
tax-equivalent basis,' said MacDonald. MacDonald added that for
investors in higher tax brackets municipal bonds should be the
cornerstone of any portfolio. MacDonald is encouraged by today's
historically low default rates in the muni market despite the anxiety
created by Puerto Rico and other fiscally-challenged issuers. He said he
sees plenty of opportunities to add high-quality sources of yield
potential. 'Muni bond issuers are generally behaving in a more
fiscally-disciplined manner and it makes sense to identify the sources
of stress,' said MacDonald. 'It is important to determine whether those
headwinds are specific to an individual issuer or represent broader,
structural themes influencing the market.' In terms of new issues
hitting the market, MacDonald said that he is still seeing a lot of
refinancings and supply has been 'lower than it has been historically'.
On the flip side, demand has been very strong with over 40 weeks of
positive fund flows coming into the muni market, thereby creating a
positive technical backdrop. MacDonald favors revenue bonds, which are
backed by cash flows from a specific entity, as opposed to general
obligation (GO) bonds, which are backed by the full faith and credit of a
municipality. 'When you look at a lot of the bad headlines in the
municipal market, a lot of them are coming from the general obligation
level and a lot of that stems from the pension obligation issue which is
starting to come home to roost,' said MacDonald.
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