August 16, 2017
The municipal market has become increasingly focused on the political drama of Illinois and Chicago, eleventh-hour passages of 2018 budgets, and the restructuring of Puerto Rico’s debt complex. As the themes that led to these issuers’ credit deterioration extend to other municipalities, we expect the watch list of weaker credits in the municipal market to expand. Rating agencies have recognized that credit risk has broadened to more states, as evidenced by their negative actions against 11 states in the first half of 2017. Eleven states began fiscal year 2018 without enacting budgets, up from four states last year. Inescapable structural pension issues and reconciliation of far-reaching federal policies (e.g., healthcare) will continue to put pressure on cash-strapped municipalities.
The Bloomberg Barclays Municipal Bond index posted a 2.0 percent gain during the second quarter of 2017, with longer-maturity bonds continuing to outperform the short-end and lower-quality bonds outperforming higher quality. BBB-rated and A-rated municipal bonds returned 2.1 percent and 2.2 percent, versus 1.9 percent for AA-rated bonds and 1.7 percent for AAA-rated bonds.
Following 2016’s record-setting year for municipal debt issuance of approximately $446 billion, year-to-date supply ending June 30 declined by approximately 13 percent year over year.
Source: SIFMA. Guggenheim Investments. Data as of 7.25.2017.
Since 2011, average annual new money supply hovered at levels approximately 33 percent below that of the decade ending in 2010. In contrast, refundings began to exceed new money supply each year since 2012, which has methodically narrowed the municipal market’s breadth of issuers. Within this new issuance pattern, volumes have been dominated by the same states and issuers. In addition, supply trends will be influenced by refinancings upon the 10-year anniversary of the Build America Bonds program, which lasted from February 2009 to December 2010, when approximately $15 billion and $30 billion of taxable bonds become callable in 2019 and 2020, respectively. We believe supply-demand dynamics and negative sentiment on credit risk will keep us focused on higher quality benchmark names and issuers neglected by wide market coverage.
Refundings began to exceed new money supply each year since 2012, which has methodically narrowed the municipal market’s breadth of issuers. Within this new issuance pattern, volumes have been dominated by the same states and issuers.
Source: Thomson Reuters, Guggenheim Investments. Data as of 7.25.2017.
—James Pass, Senior Managing Director; Allen Li, CFA, Managing Director
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management. ©2017, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
Investors should stay guarded for exogenous shocks that could pull the next recession forward and cause markets to reprice credit risk.
If you want to see who the real victims of tariffs are, go look in the mirror.
Shortening duration, maintaining an investment-grade portfolio, and generating attractive yields do not have to be competing investment objectives for core fixed-income investors.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”
You are now leaving this website.Guggenheim assumes no responsibility of the content or its accuracy.
Your browser does not support iframes.
2018 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.