As investors brace for the possibility of interest rates being held higher for longer, one investment area has actually benefitted from a high-rate environment. Nuveen Head of Municipals Dan Close joins Catalysts to discuss the benefits of investing in municipal bonds as the Federal Reserve weighs the odds of future rate cuts.
Close notes two major themes occurring. The first is rates on 10-year Treasury yields (^TNX) rising 50 basis points. He explains that this increase has affected everything in fixed income, making it 50 basis points cheaper than it was at the beginning of the year.
The second theme boils down to supply: Close states that the supply of municipals has gone up, with April and May seeing more than $40 billion in supply. He believes that this sets up the second half of the year as issuance will decrease closer to the election.
"I think we're also going to have a very, very good technical the next two months where you're going to have $80 billion in coupons, in maturing bonds, in all these different proceeds that recycle back to the muni market very quickly. And those are both very, very good technical backstops," Close tells Yahoo Finance.
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
This post was written by Melanie Riehl
Video Transcript
Inflation and a strong job market has sent jitters the markets over the past few months as investors brace for the possibility that rates could be higher for longer.
But one investment vehicle has been seeing some benefits from the high rate environment, municipal bonds and joining us now and stand close new head of municipal d. Thank you so much for joining us.
Now, there is this expectation that the fed could begin to cut rates later on this year.
Given that is now the appropriate time to put some money to work in Munis.
Sure.
And, and thank you so much for having me, Ali.
I do appreciate it.
Uh We certainly think so.
I mean, if you look at what's happened to Muni's so far this year, there's been two broad themes.
One is treasury rates on 10 year treasuries has gone up 50 basis points.
So that's affected everything in fixed income, including Munis and 50 basis points cheaper than we started the year.
Uh And the second thing that's really impacted Muni and why we think it's such great value right now is the supply of Muni.
We've seen supply go up of municipals through the end of May up 40%.
And with that, we've had two back to back months, the months of April and May where we saw more than 40 billion of supply.
I think what that really does is it sets us up really well for the second half of the year, the second half of the year.
I don't think we're gonna see as much issuance.
We're hearing from underwriters.
We're hearing from Issuers bankers that they're bringing deals forward that normally would happen in the fourth quarter so that they avoid the election and they avoid all the issues that happen in the 2016 election.
So I think we'll have less issuance and I think we're also gonna have a very, very good technical the next two months where you're gonna have $80 billion in coupons in maturing bonds in all these different proceeds that recycle back to the Muni market very quickly.
And those are both very, very good technical backstops.
And, and I think as well as we were discussing right before, you know, six and a quarter percent for a AA intermediate Muni strategy, I think is very attractive and, and nine and a quarter percent for a high yield I think is just a number which is going to go in and draw investors off the sideline.
Yeah, I mean, those are significant yields particularly when we're used to talking about things like treasury corporate bonds.
The returns are just not as high.
I am curious in terms of risks for those returns.
How closely are you and municipal bond holders supposed to be watching the macro data and any potential softness we might be seeing in that data and what read through could that have to Munis?
Yes, sure.
We have 23 credit analysts at Naveen where all they're doing is looking at the broader macro and, and I think as we, I take a step back and look at it, we don't usually see a high correlation between the economy and defaults in municipals.
Uh by that, I mean, you know, your water and sewer bill, you're not gonna go in and fail to pay your water and sewer bill no matter the economy.
It's a really inelastic demand curve for most of what these have.
These are essential service, monopolies, somewhat recession proof, somewhat recession proof and almost everything we see, we just don't see a large correlation between defaults in Muni and where the rec and where the economy is.
Yes.
And given that, you know, the Munis base very fragmented.
What sectors or areas are you most bullish on right now?
Yes.
So more than 50,000 different issuers in the town I live in, I'm just north of Chicago.
There's nine issuers alone in that town.
So it is a very fragmented market.
On the high grade side.
We're really looking at local general obligation bonds.
These are uh bonds that are repaid by property taxes.
We think with the housing market continuing to do well, that's a very good place to be and they're offering very good yields.
On the high yield side, we're really favoring land, secure deals.
These are deals that uh are financed by build outs in states like Florida for potable water, for streetscapes and that are ultimately repaid by property taxes uh and, and different assessments.
So we're very bullish on those two.
We think those are gonna do very well uh recession or no here over the next couple of years, I do want to bring this a little bit closer to home here in New York City because Governor Kathy Hole did move to kill congestion pricing policy and now some are calling on MT A Muni bond holders to fight back against that move.
I want to pull a post from the director of a nonprofit focusing on public enterprise saying that I'm calling on anyone who purchased MT A Muni Bonds to come forward and bring the lot to bear on the state of New York.
I'm not going to ask you about congestion pricing.
We're not going to get into that tit for tat here, but I am just curious generally, how much power historically do many bond holders have over public policy?
And is this a way for investors, retail investors listening to this segment now to who are invested in local politics to maybe have another avenue of influence is not the word I'm looking for but influence.
Yeah.
Well, and it's interesting to see that, that congestion pricing would have been, uh we think very favorable for mini bonds.
You go in and you take a billion dollars in what we expected the revenue to be.
You could leverage it up to 15 billion by issuing debt.
That really helps out the capital structure.
You know, if you go in and you have fewer cars on the street because of the congestion pricing, then you also go in and support the, the fair backs bonds.
You know, owning mini bonds.
There's, you don't have uh unlike on the equity side where you could go in and you could vote for directors and you could vote for different uh governance issues.
We really don't have that as much as large holders uh in the MT A.
We certainly do have influence, but it's something traditionally asset managers, at least on the municipal bond side have really exercised to too much.
We uh we have 100 and 25 year history at Naveen of providing tax exempt income.
Part of that is also knowing that uh sometimes local matters and local affairs uh not weighing in on this much.
Well, really quickly here, I know that you had a take for us on airports and uni bonds and obviously huge travel demand coming up this summer.
What read through does that have to airport bonds?
So airport bonds have done very well.
This year.
Uh We've seen about 3.5 billion of issuances.
So Midway sfo had an issuance.
Um we've, we've seen issuance come through and anticipate about 20 billion or so of issuances uh for the balance of the year.
So II I think it's been interesting.
Airport credit has done really well.
You think of airports that lost 80% of their top line revenue and yet we have more upgrades and downgrades and 25% of them are better rated than where they were before the pandemic.
So in airports, we expect uh more issuance and a lot of this issuance is not being driven by runways, it's not being driven by gates, it's being driven by the passenger experience lounges and rest restaurants and shopping.
And so it's more of an experience rather than uh that we're financing rather than the traditional brick and mortar.
So we do anticipate more airport issuance for the balance of the year, fully 20 billion for 2024 and 100 and 50 billion by the end of 27.
Really interesting, Dan, it's always great to speak with you because you have an ability to bring Muni bonds into the reality for folks.
So really appreciate it.
Thank you for coming in studio.
Thanks so much for having me.
Well, that is Dan Close.
He is Naveen head of Municipals.