Munis are attractive again as Investors are finally getting paid with higher yields and the tax advantage. However, diligent research sets active managers apart.
Stability + Reserves + Yields = Opportunities in Munis
What areas of opportunity do you see in the muni market?
Value. Three points in favor of munis as of today and going forward: stable sector, reasonable reserves, and very attractive yields.
First, we are a stable sector. We invest in essential service providers, school districts, state governments, etc. The impact should be less in a hard or soft landing than for other capital market borrowers.
Second, municipal borrowers have done well building up their reserves – through prudent management for some and plenty of COVID funds. For most, we’re talking about reserves that are twice as high as compared to the 2008 period, just before the Great Recession.
Last but not least, investors are getting paid, finally. Both on an absolute and relative basis – we see AAA-rated housing deals with yields as high as 4.25% inside 10 years. We also see credit spreads finally widening – investors are getting paid to add on sectors such as healthcare and pre-paid gas. We are back to historical spread levels, and things look attractive. And also on a relative basis – compare us to the corporate sector – munis look good, even great.
But remember, our team at Thornburg achieves this through careful and diligent credit research. Buy but also sell discipline is important, careful selection & surveillance of ultimate borrowers, identifying parts of the curve that add value, all that work as opposed to simply managing passively to an index.
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