Municipal Bonds

The GMO Asset Allocation Team has released its latest 7-Year Asset Class Forecasts through January 2021.

About a week ago, an unprecedented polar vortex descended upon the southwestern United States. The deep cold forced power plants in Texas to take production offline, leading to rolling blackouts and leaving more than four million households without power.

Political change, continued fiscal support will drive municipal markets in 2021, although outcomes are likely to vary.

As COVID-19 vaccines roll out and resrictions lift, a US economic rebound could lead to tighter Federal Reserve policy and higher yields. Municipal bond investors may worry about how rising yields could hurt their portfolios.

Many investors think there are only two options in a market where participants have become overly exuberant, either 'I want in' or 'Get me out.' Our strategies are more nuanced, and we believe fit better with what we expect to transpire.

Rather than going deep into one theme, this week we will do a “Random Thoughts” from the Frontline. Today we will cover several topics in shorter form: valuations, infrastructure, the debacle in Texas, and a lot more.

In late 2020, a new kid emerged on the bargain-of-the-decade block. UK stocks, and notably UK value, reached very cheap levels relative to value stocks in other developed economies. Today, UK value remains at remarkably low valuations relative to most of its fundamentals.

Apart from some high-profile downgrades, the muni credit markets finished 2020 buoyed by breakthrough vaccines and signs that state and local tax collections were better than anticipated.

It’s tempting these days for some investors to question the role of fixed income in portfolios. After all, real yields have plunged, potentially leading to less income today and smaller capital gains tomorrow.

Is inflation coming? At some point, yes. We know what generates inflation, and we will be watching for it. Until then, we do not expect a wildfire in inflation land.

A brief monthly update on what's happening in the municipal bond market.

• Tax-exempt municipal bonds generated solid performance in January, with high yield munis gaining more than 2% on the month.
• Municipal yields rose early in the month on expectations for higher rates and additional fiscal stimulus.
• Although issuance was relatively light in January, the municipal market experienced strong demand, with four consecutive weeks of fund inflows.

The object of the game was to get to the finish line first and then become the leader the next round. The stock market has its own game of “Simon says” and that is in the mall property world.

Despite questions over financing the European Union’s (EU’s) new Green Deal, the green transition is now under way.

To say the market is bubblelicious is a bit of an understatement given that retail “investment” in call options and penny stocks is quite literally off the charts, dwarfing numbers we saw in 1998-2000.

If, however, the pandemic continues into summer, it will mean the Gripping Hand is still squeezing us. Employment won’t recover and more small businesses will fail. This relief package, as large as it is, may prove necessary and maybe even too small.

Rob Arnott: “There hasn’t been a better time to be a value investor at any other time in my career. I look back at the tech bubble and I never thought I would see valuations stretched the way they were then. We're back to that, and then some." We invite you to revisit “Reports of Value’s Death Have Been Greatly Exaggerated” now published in the Financial Analysts Journal.

Hope is high that economic growth will accelerate as more people are vaccinated against COVID-19, but so far economic data has been lackluster. Meanwhile, bond investors are expecting inflation despite signs that the economic recovery’s momentum may be stalling. Why does everything seem so disconnected?

Recent volatility and high valuations underscore the need to be selective, but risk premiums still justify a moderately pro-risk stance, in our view.

This is a new type of exchange-traded ETF that is built differently from a traditional ETF.

Having strongly underperformed the wider stock market in 2020, high-dividend stocks have shown early signs of a rebound in recent weeks.

Our Fixed Income CIO Sonal Desai shares her investment views and strategies for the post-pandemic recovery. She explains why inflation looks likely to gain steam, and how the balance of fundamentals and valuations become especially crucial today when looking for attractive returns in fixed income.

I don’t say this often, but Fed Chairman Jerome Powell is wrong. Regular readers of our investor letters and other publications will recall that we regularly cite Chairman Powell as doing the best he can with the levers he has while arguing correctly for others to do their part.

Relative value currently favors floating-rate loans over high-yield bonds.

Rick Rieder and team think that today’s potent policy cocktail holds important implications for the path of economic growth, markets and the value of a dollar.

Fortunately, human behavior has a history of repeating itself at extremes. The worst buying decisions are made at the top. Just like bonds, the convexity is true when yields rise going forward. It’s a slippery slope and could be vexing.

Inflation is not dead. It is not gone. It has not been tamed. We know it seems like it, especially after the past few decades which generated in many an "inflation-complacency" that feels justified. After all, following the 2008 Financial Panic, many predicted Quantitative Easing would cause hyper-inflation.

At some point, interest rates will move higher. Advisors must understand the inherent risks, and proactively evaluate alternatives for their fixed income portfolios to manage through successfully.

The pandemic has accelerated an evolution in bond trading, and it is already making a difference for investors—if bond managers have embraced tech-enabled trading.

It’s hoped that an extra $1,400 in the pockets of everyday Americans may help support lagging U.S. consumption. We believe the stimulus, along with improved vaccine roll out, may also help support commercial air travel.

Today I want to discuss an arcane-sounding but incredibly important term you need to know: Yield Curve Control. Several central banks are already using it and I see a strong possibility the Fed will join them. But first we must again consider the Gripping Hand.

With the previous week’s short-squeeze headlines behind us, investors remained optimistic about a fiscal support package, which passed the Senate by a vote of 51-50, with Vice President Harris breaking the tie.

Effective vaccines, historic fiscal stimulus, Democratic Party control of the legislature, even more stimulus, reopening economies, 6% U.S. real GDP (gross domestic product) growth, 25% U.S. EPS (earnings per share) growth, and maybe even an infrastructure plan sprinkled on top.

The 4th quarter of 2020 began with tremendous anxiety and divisiveness around the Presidential election. Investment markets reflected that anxiety.

The COVID-19 crisis opened up cracks in the muni market, but we don’t expect those cracks to alter the reality that municipal bonds can be a relatively conservative investment option. Many municipalities are under stress, but that’s not a reason to avoid munis, in our view.

Treasury yields continued to march higher in January, with the move again concentrated in longer maturities. Mortgage spreads tightened slightly, while corporate bond spreads were mostly mixed. The market remains stuck between the push/pull of the prospect for greater fiscal stimulus and ongoing vaccine rollout versus continued lockdowns and the greatest one-month mortality rate since the pandemic began nearly a year ago.

Cyclically oriented value stocks could make a comeback in 2021, yet there’s still a place for durable growers in a balanced equity portfolio.

We’ll touch on several bases today. We start with the latest news from the Commerce Department which just released its initial estimate of 4Q economic growth (or lack thereof). 2020 goes down as the worst economic year since the end of World War II.

Collateralized loan obligations are the largest source of demand in the loan market. Cheryl Stober breaks down some key drivers of CLO manager behavior.

Massive growth in central bank balance sheets via quantitative easing, debt monetization, and firing of “big bazooka” stimulus packages brings renewed focus to potential shocks in the business cycle. An awareness of the macroeconomic “shocks” and their impact on asset prices should be incorporated in investors’ tactical asset-allocation decisions.

In this piece, BlackRock Global Allocation Fund portfolio manager Russ Koesterich discusses the implications of a rise in stock-bonds correlations.

Nothing so animates a speculative herd as a parabolic price advance in an asset detached from any standard of value. I am convinced that future generations will use the present moment to define the concept of a reckless speculative extreme, in the same way our generation uses “1929” and “2000.”

In a year that offered a pandemic and an election as reasons for investors to bail on risky assets, 2020 turned out to be a great year for those that stayed the course. A 60/40 portfolio of diversified stocks and bonds increased by a double-digit percentage, exceeding expectations.

I’m often asked if I foresee inflation or deflation. Both are possible in their own ways, and frankly I feel a little funny telling people I think we will see both. I would just like to have a growing economy and dependable money that holds its value.

There has been a lot of talk about whether the stock market is in a bubble. As usual, there are distinguished professionals on both sides of the debate, armed with convincing statistics and arguments. So, what is the average investor to do?

Bank loans offer some of the highest yields in the current interest rate environment. We believe their unique characteristics may prevent many investors from considering them, but it may be a mistake to overlook them.

Inflation will likely heat up in the coming months, but not to worrying levels.

Over the last dozen years, investors holding the classic US 60/40 portfolio were substantially better off than their diversified peers, yet now is not the time to abandon diversification and diversifying asset classes. We believe it is imprudent to trust that escalation in valuations will continue unabated into the next decade...

For all Millennial readers, if you visited a casino in your lifetime only to see your money quickly disappear, you have not seen anything compared to trading versus professionals. So to all you Robinhood traders I say, “Welcome to the Jungle.”