Munis Still In Bloom Despite The Pandemic

The muni bond asset class has come a long way since the darker days of March when a sell-off of historic proportion took hold as mutual fund complexes struggled to meet swelling redemption needs. Market technicals are now back as a reliable barometer of price movement and asset performance with new-issue supply more predictable and the insatiable appetite for tax-efficiency and portfolio diversification again intact. Nevertheless, credit headlines are expected to continue with greater visibility as a wider range of sectors and issuers reveal operational pressure related to the economic suspension and the residual effects of a possible second wave. The muni market had been looking for a well-orchestrated deployment of liquidity and credit support as a way to respond to degrees of market stress and to contain a broader contagion impact, and that is exactly what it received in the form of a series of preemptive monetary and fiscal policy actions.

While there remains a list of medical and scientific unknowns surrounding this evolving public health crisis, we find ourselves better positioned today to make strategic market and credit assessments. Consumer and market sentiment have improved with a meaningful reversal of the COVID-19 growth curve, yet state and local governments are taking direct actions to contain spiking transmission rates, even at the expense of sacrificing recovery progress. The municipal bond market entered the crisis from a position of strength and while there are vulnerabilities as the financial markets navigate these uncertain waters, we believe that the asset class will demonstrate resiliency with a manageable impact on credit.

Market disruption and volatility have been tempered, and the narrative surrounding the abrupt recession has now transformed into encouraging evidence that state and local governments as well as many revenue enterprises are better positioned than perhaps initially thought to mitigate the effects of COVID-19. As we conduct our daily business of making credit assessments, we are comforted by a strong presence of cash and budgetary reserves tied to a wide variety of municipal credits. Shock and paralysis have now been replaced with consistent interest in making strategic muni portfolio investment decisions.

The municipal bond market was fairly quiet in June with yields holding to a tight trading range. The new-issue market kept itself busy with a number of deals becoming oversubscribed and upsized and overall placement came in strong. Secondary activity had an orderly flow with manageable bid lists. One of our recurring themes, even before COVID-19, has been the outsized availability of cash ready for deployment, and the current trend of positive mutual fund flows strengthens this observation even though credit pressure remains front and center to the investment calculus. Strong investor demand comes at a good time now that seasonal supply technicals are here.

For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Professional.