Despite periods of cooling in 2015, municipals generally see support

In the following slides, portfolio manager Greg Gizzi provides a high-level view of the municipal bond market, and municipal bonds’ importance within today’s investment environment.

Municipal bonds are often expected to offset portfolio volatility and offer tax-advantaged yield. Munis have lived up to these expectations in 2015, and there is a strong case that they could continue to offer value as a new year approaches.

In his overview, Greg looks at a handful of events that have surprised some municipal market participants this year, and highlights his team’s main assumptions about market dynamics in the coming months. He concludes with several points that help make the case for investing in municipal bonds.

Competitive returns amid challenging conditions

2015 has been a volatile year for most asset classes, and fixed income has not been an exception. How did municipals perform, relative to their fixed income peers?

Data: Morningstar Direct. Year-to-date through August 31, 2015.

Past performance does not guarantee future results.

Performance drivers for 2015

Performance drivers for 2015 (through September 30, 2015)

An appetite for income, together with a longing for strong credit quality, have been key conditions when describing municipal bond performance thus far in 2015. Broadly speaking (particularly at the state level) credit metrics have been getting better. Against that backdrop, support for bond prices has also come in several other forms, including three principal sources:

  • a positive supply-demand relationship
  • attractive pricing
  • a knack for shaking loose from the headline trauma that had lingered in prior years.

The next three slides look more closely at each.

Heavy deal flow, absorbed by strong demand

Heavy deal flow, absorbed by strong demand

Municipal bond issuance is on pace to set a calendar-year record in 2015. Due to persistently low interest rates, refunding activity has accounted for approximately 60% of supply thus far in the year.

Year over year municipal bond issuance

  Total $ billion
2003 $380.2
2004 $358.1
2005 $407.2
2006 $386.0
2007 $429.2
2008 $389.3
2009 $409.6
2010 $433.1
2011 $295.2
2012 $382.4
2013 $334.9
2014 $337.5
2015* $425–450 expected

The stream of new bonds has been well received. In addition to traditional mutual fund subscribers, the market has been visited by nontraditional buyers as well — these are opportunistic investors who don't necessarily focus on tax exemption, but who seek the total return potential exhibited by municipals.


Data: Securities Industry and Financial Markets Association (SIFMA)

Attractive pricing

Attractive pricing

Relative to Treasurys, long-term municipal bonds often represent an attractive value. Historically, yields on 30-year AAA municipal bonds (even without adjusting for tax exemption) have often exceeded long-term Treasury yields. (Indeed, the 30-year AAA-rated average ratio of municipal yields to Treasury yields for the period shown is slightly more than 106.)

It's worth noting that since the global financial crisis, municipal bond prices have been relatively elevated, keeping the ratio in sober territory (for the most part).

Data: Thomson Reuters.

Putting the past in perspective

Putting the past in perspective

Across the municipal bond market, negative shocks have been absent thus far in 2015. But negative events in prior years have caused powerful hangovers, and the unsustainable financial picture in Puerto Rico has been a notable lightning rod. Nonetheless, investors have done a good job of compartmentalizing the debt problems unique to the island. As shown, year-to-date returns for high yield municipals were well into positive territory after excluding the effects of Puerto Rico obligations.

Data: Morningstar Direct.

Past performance does not guarantee future results.

Never rule out surprises

Never rule out surprises

Analysts and investors watched as a handful of surprises affected the municipal bond market. Not least of these was the market's reaction to pension plan providers who consistently fail to meet regulatory standards.

More specifically:

  • Ratings agencies have responded, putting certain municipal issuers on negative watch. Spreads have widened as markets have already priced in the possibility of negative credit actions.
  • Markets penalized states that consistently failed to meet their so-called actuarial required contributions.
Key assumptions for the near term

Key assumptions for the near term

  • We anticipate more moderate total return performance across the municipal bond market in 2016. We believe that bond income should sufficiently offset any price declines that may be prompted by the onset of higher interest rates.
  • The Federal Reserve will become increasingly likely to raise rates in late 2015.
  • Bond issuance could see an uptick, largely based on refinancings.
  • In terms of new-money issuance, we think 2015 could be the fourth consecutive year of lower volume. However, looking out longer term, we believe financing for sorely needed infrastructure projects could be a driver. This will depend on political will and policy priorities, but it's a pressing situation that we will continue monitoring.
$3.6 trillion
Estimated investments needed in U.S. infrastructure by 2020.*

*Data: American Society of Civil Engineers, as of Nov. 14, 2014. Most recent data available.

Do municipal bonds make sense for you?

Do municipal bonds make sense for you?

No asset class can avoid periodic bouts of volatility, and municipal bonds have seen their share of market movement. That being said, we think it’s worth reminding people why munis are an attractive complement to other assets in the portfolio of an individual investor.

We don’t think it’s too conservative to refer to municipal bonds as "rainy day assets."

Among the characteristics that make municipal bonds unique, consider the following two standout traits.

Tax features

Tax features

Generally speaking, income generated by municipal bonds is not subject to federal taxes (and in certain cases, tax exemption is granted by state and local authorities as well). This feature is particularly attractive when you consider the so-called taxable-equivalent yield that a taxable security would have to generate in order to match a tax-free yield.

Data: Thomson Municipal Market Data; Bloomberg.

Credit strength

Credit strength

Over the long term, municipal debt has posted default rates that are substantially lower than those for comparably rated corporate debt.

  Municipal rated debt Corporate rated debt
AAA 0.00% 0.48%
AA 0.01% 0.99%
A 0.06% 2.72%
BBB 0.37% 4.41%
Below investment grade 7.52% 32.41%

Data: Moody's Investors Service, August 2015.

Launch slideshow

Charts are for illustrative purposes only.

The views expressed represent the Manager's assessment of the market environment as of October 2015, 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.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


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 that hinder an issuer’s ability to make interest and principal payments on its debt.

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, potentially forcing the Fund to reinvest that money at a lower interest rate.

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

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

Bonds are rated by nationally recognized statistical rating agencies that include Standard & Poor’s, Moody’s Investors Service, and Fitch, Inc. Bonds rated AAA represent highest quality; however, the security’s credit rating does not eliminate risk.

The Bloomberg Barclays Municipal Bond Index measures the total return performance of the long-term, investment grade tax-exempt bond market.

The Bloomberg Barclays 3–15 Year Blend Municipal Bond Index measures the total return performance of investment grade, US tax-exempt bonds with maturities from 2 to 17 years.

The Barclays US Treasury Index measures the performance of US Treasury bonds and notes that have at least one year to maturity.

The Bloomberg Barclays US Aggregate Index is a broad composite that tracks the investment grade domestic bond market.

The Bloomberg Barclays US Corporate High-Yield Index is composed of US dollar–denominated, noninvestment grade corporate bonds for which the middle rating among Moody’s Investors Service, Inc., Fitch, Inc., and Standard & Poor’s is Ba1/BB+/BB+ or below.

The Bloomberg Barclays US Credit Index measures the total return performance of nonconvertible, investment grade domestic corporate bonds and SEC-registered foreign issues. All bonds in the index have at least one year to maturity.

The Barclays US Corporate Investment Grade Index is composed of US dollar–denominated, investment grade, SEC-registered corporate bonds issued by industrial, utility, and financial companies. All bonds in the index have at least one year to maturity.

The Bloomberg Barclays High-Yield Municipal Bond Index measures the total return performance of the long-term, noninvestment-grade tax-exempt bond market.


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Your financial advisor can help you decide if an allocation to municipal fixed income securities is appropriate for your portfolio in light of your goals, time horizon, and attitude toward risk.