PRINCETON, N.J., July 25, 2018 /PRNewswire/ -- MacKay Municipal Managers TM, the municipal bond team of fixed income and equity investment management firm MacKay Shields LLC, today published a mid-year update to its top five insights for the municipal bond market in 2018.
John Loffredo and Robert DiMella, co-heads of MacKay Shields Municipal Managers, commented on the team's outlook: "In the first half of 2018, municipal market technicals have been supportive while rising rates have been a headwind contributing to a wide range of municipal portfolio returns. This demonstrates that an active approach, inclusive of optimum yield curve positioning and credit orientation, can make a meaningful impact and drive outperformance. In the second half, we believe the market will benefit from municipal bonds' "scarcity value" as reinvestment dollars exceed supply. At the same time, we maintain a constructive view of high yield municipals as investment grade municipals "catch up" and narrow the gap of outperformance."
To view the full Mid-Year Update with commentary on the insights that were released in January 2018, please click here.
Mid-Year Update: 2018 Municipal Bond Market Insights – "A Year of Return and Risk"
1. Taxable Municipal Issuance Accelerates.
- Mid-Year Status Update: We believe issuers will likely refinance their higher cost tax-exempt debt with taxable municipal bonds since advance refundings in the tax-exempt market are no longer an option. While taxable municipal bond issuance is not currently on track to double in 2018, the market has observed an increase, if annualized, of ~20%i. We believe this will accelerate over time, particularly as the market observes more clarity in Washington DC related to infrastructure spending.
2. High Yield Municipal Bonds' Outperformance Continues.
- Mid-Year Status Update: Through June 30, 2018, year to date performance for the Bloomberg Barclays High Municipal Bond Index was 3.66%, outperforming the Bloomberg Barclays Municipal Bond Index by 391 basis points which returned -0.25%% for the same periodii.
3. Intermediate Municipal Bonds Underperform.
- Mid-Year Status Update: On a year to date basis through 6/29/2018, the intermediate segment of the municipal market has underperformed an actively managed investment grade portfolio taking a barbelled approach with a focus on credit-oriented bonds. For example, and on a year to date basis through 6/29/2018, the MainStay MacKay Tax Free Municipal Bond Fund (MTBIX), has returned 0.73%iii while the Bloomberg Barclays 5-10 Year Index has returned -0.36% during the same periodiv. The Funds benchmark, the Bloomberg Barclays Municipal Bond Index, has returned -0.25%v.
4. Tax-Exempt Municipal/Treasury Ratios Hit 20-Year Lows.
- Mid-Year Status Update: In early 2018, projections of low supply and high demand materialized, although rising rates caused 10 and 30-Year Municipal/Treasury yield ratios to rise as of 6/29/2018. At the same time, 5-Year ratios have declined thus far in 2018. MacKay Municipal Managers believes a decline in Municipal/Treasury yield ratios will accelerate in the second half of 2018. Yield Ratios – 5, 10, and 30 Year vi
- As of 1/1/2018: 76%, 82%, and 93% respectively
- As of 6/29/2018: 73%, 86%, and 98% respectively
5. Tax-Exempt Market Liquidity Declines.
- Mid-Year Status Update: In light of lower corporate tax rates, banks and P&C insurance companies scaled back municipal purchases and were also net sellers in the first half of the year. As referenced in insight 3, the intermediate maturity segment of the municipal market has underperformed due to this lack of buying from a consistent liquidity provider. Large broker dealers remain active in the secondary market, however, this activity has been heavily tied to recent underwritings while smaller regional broker dealer's activity in the secondary market has dropped significantly also detracting from market liquidity.
About MacKay Shields LLC
MacKay Shields LLC ("MacKay") is an indirect wholly-owned subsidiary of New York Life Insurance Company and a wholly-owned subsidiary of New York Life Investment Management Holdings LLC. MacKay is a fixed-income and equity investment management firm with $110.9 billion in assets under management as of June 30, 2018. MacKay manages fixed income and equity strategies for institutional clients, mutual funds, and high-net worth individuals.
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Active management is the use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio. Active management strategies typically have higher fees then passive management.
Advanced refunding enables an issuer to "refinance" and obtain the benefit of lower interest rates when their outstanding bonds that offer higher interest rates have not reached their callable date.
Before You Invest
Mutual funds are subject to market risk and will fluctuate in value.
A portion of a municipal fund's income may be subject to state and local taxes or the Alternative Minimum Tax. Funds that invest in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner. High-yield securities (commonly referred to as "junk bonds") are generally considered speculative because they present a greater risk of loss than higher-quality debt securities and may be subject to greater price volatility. High-yield municipal bonds may be subject to increased liquidity risk, as compared to other high-yield debt securities. Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers, and the possibility of future tax and legislative changes, which could affect the market for and value of municipal securities. Such uncertainties could cause increased volatility in the municipal securities market and could negatively impact the Fund's net asset value and/or the distributions paid by the Fund. Securities purchased by the Fund that are liquid at the time of purchase may subsequently become illiquid, due to events relating to the issuer of the securities, market events, economic conditions, or investor perceptions.
Credit ratings: Standard & Poor's rates borrowers on a scale from AAA to D. AAA through BBB represent investment grade, while BB through D represent non-investment grade.
Past performance is no guarantee of future results. It is not possible to invest directly in an index.
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This material contains the opinions of the MacKay Municipal Managers'™ team of MacKay Shields LLC, but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only, and is not intended to constitute the giving of advice or the making of a recommendation. The investments or strategies presented are not appropriate for every investor and do not take into account the investment objectives or financial needs of particular investors. An investor should review with its financial advisors the terms and conditions and risks involved with specific products or services and consider this information in the context of its personal risk tolerance and investment goals. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Any forward looking statements speak only as of the date they are made, and MacKay Shields LLC assumes no duty and does not undertake to update forward looking statements. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Historical evidence does not guarantee future results. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.
New York Life Investments engages the services of MacKay Shields LLC, an affiliated, federally registered advisor, to subadvise several Funds. New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds® are managed by New York Life Investment Management LLC and distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.
i J.P. Morgan
ii Bloomberg Barclays Municipal Bond Index and Bloomberg Barclays High Yield Municipal Bond Index, as of June, 2018
iii Morningstar – Performance As of 6/29/2018
iv Bloomberg Barclays Municipal 5-10 Year Index
v Bloomberg Barclays Municipal Bond Index
vi MMD: Thomson Reuters as of January 1, 2018 and June 29, 2018
SOURCE MacKay Shields LLC