Municipal market review: Continued recovery

After a difficult start to 2018 that underwent pressure from rising rates and other factors, the municipal fixed income market continues to recover. In this brief video, Senior Portfolio Manager Greg Gizzi looks at two potentially positive factors that could help the municipal market, including expected supply and a key approval by Congress of high-quality municipal bonds.

Municipal market review: Continued recovery

Gregory A. Gizzi
Senior Portfolio Manager

The municipal market continues to recover from a poor start in 2018, looking to end the month down approximately 40 basis points year to date after being down as much as 165 basis points in April. Supply continues to track below last year by about 20% to 25%. Tax-exempt bond funds have seen positive cash flows of approximately $5 billion, which has helped the market recover from its lows.

As we head into June, there are two positive elements which should help municipals through the summer months. First, for the next three months, we are expecting negative net supply of approximately $80 billion dollars. This means that investors would have proceeds returned to them from calls, maturities, and interest payments that could exceed expected supply by $80 billion dollars, setting up a strong technical condition in the market that could be supportive of performance.

Second, high-quality municipal bonds were approved by Congress as high-quality liquid asset (HQLA) 2B designated assets for the purposes of banks reporting their liquidity coverage ratios (LCR) under Dodd-Frank regulations. Municipals are now rated equally to corporate bonds for pledging purposes. This should incentivize banks to look at the municipal asset class from a new vantage point other than pure relative value post tax reform.

We hope you enjoy your summer and continue to recognize the value of investing in municipal bonds!

The views expressed represent the Manager's assessment of the market environment as of June 2018, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions.

Bond funds may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.

Funds that invest primarily in one state may be more susceptible to the economic, regulatory, and other factors of that state than funds that invest more broadly.

Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to state or local taxes and/or the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.

HQLA 2B designated assets refer to high-quality liquid assets that consist of Level 2A assets (including certain government securities, covered bonds, and corporate debt) and Level 2B assets (including lower-rated corporate bonds, residential mortgage-backed securities, and certain equities).

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