Sector Spotlight: Consumer Staples
April 15, 2021
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Hello everyone this is Eric Zubris, Investment Product Specialist with MFS to take a few minutes and talk about the state of the municipal bond market.
The sell-off in the muni market in March was one for the record books and as a result has created a lot of questions.
Over the next few minutes, I want to remind everyone what the municipal bond market looked like before the sell-off in March, the dislocation that occurred in the market and lastly the recovery we have experienced recently.
State of the muni market pre-virus/What happened
So first let’s touch upon what the municipal market looked like prior to the virus. Before the virus, the demand for municipal bonds was overwhelming. In fact, up through the end of February 2020, the asset class experienced over 60 consecutive weeks of inflows.
The fundamental picture for municipal bonds was also supportive. Municipalities have spent the better part of the past 10+ years improving their balance sheets with increasing revenue and cutting expenditures. As such, the majority found themselves in a strong fundamental position. In fact, rainy day funds for states, which essentially is a cash cushion to use for unexpected expenditures was at record highs. This is important because this provides them a source of liquidity during periods of financial stress.
Dislocation in the market
Unfortunately, the environment for the municipal bond market is different today than what it was at the beginning of the year.
As a result of one of the worst and quickest sell-offs in municipal bond history, a major dislocation occurred between the US Treasury yield curve and municipal yield curve. Under “normal” circumstances, you would typically see the US Treasury curve higher than the municipal curve. Unfortunately, due to indiscriminate selling in the municipal bond market across sector, maturity and quality, the typical strong relationship between treasuries and munis broke down. As a result, it left us with the entire yield curve higher than the US treasury curve.
Let’s think about that for a second. Your now tax-advantaged yield was higher at one point than your taxable yield that was offered by US Treasuries, presenting an opportunity for investors.
Since then, the relationship between muni curve and the treasury curve have normalized a bit but there still are parts of the yield curve where opportunity remains for long-term investors.
The last thing I want to share with you is the strong recovery we have seen from the asset class recently.
Although the muni sell-off has been hard to grasp for investors, sell-offs in the asset class have happened before for varying reasons and has been able to recover from them over time.
After a challenging March and April, the municipal bond asset class in May has started to show signs of life with performance trending upwards, driven by improved risk sentiment, unprecedented fiscal and monetary policy support and strong inflows into the asset class. This recovery we have seen as of late, underscores the resiliency of the municipal bond asset class for its ability to recover from periods of stress.
Despite this being a challenging time for investors, we believe investors who stay patient, disciplined, think long-term and can see the green pasture through the cloud of smoke, have the potential to be rewarded.
I hope you found this quick update helpful. Thanks for listening.
The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.
Municipal bonds may not be for everyone. The investments you choose should correspond to your financial needs, goals, and risk tolerance.
For assistance in determining your financial situation, please consult an investment professional.