What Factors Could Affect Municipal Bonds’ Performance This Year?

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COHICK: And finally, Jim, where do you see the greatest potential opportunity as we go into the rest of 2018?

COLBY: Well, I think it’s going to continue to be high yield. We already are seeing the evidence of yet another big tobacco refinancing occurring. I don’t see the new issue calendar providing much in the way of new bonds for not just our ETF high yield product, but other high yield portfolios in this space, looking forward to supplementing those bonds that have been removed.

 I think that price performance is going to auger well. It will also support those who are still a little bit risk-averse, because of the continuing rise in interest rates, moving down the curve perhaps, selecting a shorter duration high yield product that has the potential also to perform pretty well.

COHICK: Like in previous years, that supply-demand imbalance is rearing its head again?

COLBY: Well, I think that’s going to be the theme for 2018.

COHICK: Excellent. Thanks, Jim, for your insight.

COLBY: Appreciate it.

COHICK: VanEck offers a variety of municipal bond ETFs, three based on the segmentation of the investment grade yield curve as well as three based on credit quality. If you’re interested in receiving our regular updates, we encourage you to stay in touch through the videos, emails, and subscriptions all available at our website at vaneck.com.

Market Realist

Key takeaways

Despite the rough performance of muni bonds (HYD) (MLN) in the first few months this year, as an asset class, they continue to be a source of high-quality tax-exempt income. The credit quality of municipal bonds (SMB) is also better than other bond classes. Munis’ low correlation with other asset classes makes them a good option for diversification in a volatile market. As we have discussed in this series, Fed rate hikes could affect munis’ performance if Treasury yields rise. However, empirical evidence, as shown in the chart below, has demonstrated that municipal credit has seen a better performance even when the Fed has hiked rates.

What Factors Could Affect Municipal Bonds’ Performance This Year?

Outlook for munis and fixed income market this year

In a February article, “Munis in Focus: 2018 Municipal Market Outlook,” PIMCO stated that it expects policy to drive the municipal bond market this year. US economic expansion and federal tax cuts could prove beneficial to muni bond credit fundamentals this year. At the end of 2017, Goldman Sachs estimated that new issuance of municipal bonds could fall 25% to $325 billion in 2018. However, with the demand and supply for munis returning to normal levels, the numbers could change.

A research paper by BMO Global Asset Management mentioned that it believes that even though the fixed income market had a rough start to the year, global and US monetary policy remains accommodative. This could be favorable to the fixed income market, and the asset class could continue to offer an opportunity for investors. Nevertheless, investors should be thorough in analyzing the risks that each asset class carries before going forward with any investment decisions.