Issues & Answers Special Advertising Section
June 2020

Issues & Answers: Municipal Bond Considerations In the COVID-19 Era

Mark Paris, CIO and Head of Municipal Strategies for Invesco, said the COVID-19 crisis created significant volatility in the municipal bond market. “In response, Congress and the Federal Reserve began providing stimulus and liquidity facilities to the market, which should continue to have a positive impact overall on municipal credits,” he said. The following are excerpts of an interview.

Mark Paris

Mark Paris
CIO Municipal Bonds
Invesco

“Adding some selective high yield to a diversified high-grade portfolio can possibly add significant total return to a portfolio in our opinion.”

Describe the current state of the municipal bond market?

Within high-grade municipal bonds, interest rates have stabilized, and new issue supply has improved, from March levels. However, despite this stabilization, municipal bond yields remain attractive compared to Treasuries as well as other high-quality credit sectors. This may present an opportunity for insurance companies and other investors seeking diversification from corporate credit risk. In particular, European insurers subject to the Solvency II regulatory regime and negative rates in their local bond markets may find municipals to be quite attractive considering their current yields and the fact that some infrastructure-related bonds may qualify for lower capital charges.

How have taxable municipal bonds fared and are they still an attractive asset class?

Taxable municipal bonds sold off alongside investment-grade corporates as COVID-19 weighed on the market. Although corporates and tax-exempts have stabilized, taxable municipal bond spreads remain elevated, widening over 100 basis points year-to-date, as of the end of April. We believe taxable municipal bonds are not only attractive on a spread basis versus corporate bonds but are also higher quality and experience fewer defaults with historically lower equity market correlations. We believe this represents a clear opportunity for institutional investors such as life insurers and pensions who, due to asset-liability management considerations, have a need for longer duration fixed income assets. Notably, most life insurers’ and pensions’ tax status means they do not enjoy the benefits of a tax-exempt municipal allocation, making the taxable space all the more compelling.

Where are you seeing the most attractive opportunities within the municipal sector?

Although the tone of the municipal market has improved, spreads within the high-yield market remain elevated. We believe there are attractive opportunities in larger liquid credits such as the transportation and hospital sectors. Relative to the high-yield corporate bond market, which could experience a surge in new entrants stemming from the significant current stock of BBB-rated bonds, the high-yield municipal space could be a more attractive way to utilize precious below-investment-grade budgets. With high yield also comes higher risk so we recommend being selective and relying on fundamental bottom-up credit research when investing in this asset class.

 

For Institutional Investor Use. This is being provided for informational purposes only, is not to be construed as an offer to buy or sell any product or financial instruments and should not be relied upon as the sole factor in any investment making decision. The opinions expressed are those of the author and are based on current market conditions and are subject to change without notice. Invesco Advisers Inc. 05/20. NA5152