Our perspective on global micro event and strategies.
Broadly speaking, as of this writing, we believe municipal bond (muni) valuations may offer an attractive entry point for discerning investors. As of December 2020, municipal credit spreads had yet to make up for ground lost to the COVID-19 sell-off earlier in the year (Figure 1). Lower expected 2021 tax-exempt supply and strong retail demand suggest there is room for further spread tightening.
Having said that, challenges remain. Fundamentals in some areas of the muni market continue to be tested by the COVID-induced economic slowdown. Accordingly, deep credit research remains critical in this space. Let’s take a closer look on a sector-by-sector basis.
2020: Lessons learned
Fundamentals in some segments of the municipal bond (muni) market will likely be put to the test by the COVID-19-induced economic slowdown. However, we believe this challenging market environment creates opportunities for fundamental research to select strong credits that can weather a downturn. For investors with a long-term horizon and the ability to withstand some short-term volatility, current muni valuations may offer an attractive entry point.
Some credits and sectors, such as transportation, health care, and special tax bonds, should feel a more immediate impact from the decline in revenues and the halt in consumer activity. Meanwhile, sectors such as property-tax-backed local general-obligation bonds, water & sewer bonds, and public-power credits will likely see minimal credit deterioration. The pace of ratings downgrades may accelerate in…