Stick To Our Muni Knitting Amid Global Uncertainty

Volatility, uncertainty and wide swings in asset valuations with a more advancing trajectory of commodity prices are consuming the market headlines as geopolitical tensions have now escalated to a new level with Russia’s full-scale invasion of Ukraine. We would frame the following commentary with the idea that geopolitical events remain very fluid and that market sentiment continues to evolve. Following Vladimir Putin’s broader penetration into Ukraine, any speculation of a military incursion has now been given absolute clarity. In our view, it is important to see the Fed forest through the geopolitical trees as it is currently very difficult to focus on the inflationary trajectory and responsive monetary policy while the crisis is now intensifying between Russia and Ukraine. Given the ambiguous messages that have been disseminated concerning the conflict, it is difficult to interpret the impact of any flight-to-quality trade upon Treasury prices against a backdrop of Fed speak. In our view, the Fed's policy course is pre-ordained in the sense that the Central Bank will remain committed to its wholesale unwinding of unprecedented levels of stimulus. For the avoidance of any remaining doubt, a 50 basis point hike in the Fed Funds rate at next month’s meeting has been removed from the table and the Central Bank can be counted on to deliver a 25 basis point increase in the benchmark short-term rate.

While it is difficult to predict when the bond market catalysts will change back, we believe that the crossover point will arrive sooner rather than later as out-sized inflation returns to the forefront, particularly if spikes in commodity prices, led by an energy price shock, take hold and add further inflationary disruption. As muni bond buyers attempt to formulate their investment calculus, we encourage them to stick to their knitting and to stay focused on their initial investment objectives. We recognize that the overall strategic guidance can change and so it is important to conduct comprehensive portfolio reviews as a way to identify those sectors and credits that are well positioned to demonstrate stability and resiliency throughout the economic reopening against a backdrop of rising interest rates. Fund flows have now been negative for five out of the past six weeks according to Refinitiv Lipper as market anxiety builds upon higher interest rate fears and disconcerting client statements. At the risk of sounding like a broken record, we do envision a return to a more favorable flow trajectory as technicals assume control and elements of uncertainty subside, giving rise to stronger investment conviction.

As investors are considering their portfolio reviews, here are a few things to keep in mind. While some domestic airports may encounter disruption in service demand given geopolitical concerns, we remain bullish on the sector and believe that this space will be one of the most solid beneficiaries of the reopening and can be part of investment quality portfolios. As COVID transmissions continue to drop, along with advancing therapeutics and expanding vaccine penetration rates, hospitals are returning to their core competencies with ER and ICU admissions normalizing and higher margin elective procedures regaining ground. We are optimistic that multi-site, multi-state healthcare facilities with robust balance sheets, consistently favorable operating performance, a strategic geographic footprint, and a clearly defined mission statement can demonstrate credit resiliency. Although many colleges and universities are expected to relax their hybrid academic delivery structure, demand patterns for those brand institutions having balance sheet prowess with high levels of expendable resources and a manageable debt burden, a diversified revenue stream, and strong operating margins should fare well throughout the reopening and beyond. Keep in mind, however, on-line course curriculum, hybrid offerings, as well as a more expansive evaluation of the college ROI may pressure demand metrics and overall financial performance for a growing number of institutions.

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