Why we’re constructive on munis Why we’re constructive on munis http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\video\gallo-01-15-21-still-1-small.jpg January 29 2021 January 29 2021

Why we’re constructive on munis

Municipal credit quality should improve as the economy recovers.

Published January 29 2021
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Video Transcript
00:03
Hello, I'm R.J. Gallo, Senior Fixed Income Portfolio Manager at Federated Hermes.
00:08
What is your outlook for munis?
00:09
The outlook for munis in 2021 is actually pretty constructive. Let me start first with the credit risk side of a municipal bond investment. When the economy tanked in early 2021 as COVID set in, and tax revenues fell, especially for places that derived most of their revenue from sales taxes, especially from cities that might derive a lot of their economic activity from tourism, travel, conventions and the like. There was great concern that we were going to see revenues at the state government level drop 10 to 20 percent. As it turned out, incomes, especially for middle income and high income people who can work from home, didn't plummet. So income tax revenues have not taken the hit, at least not as large as once feared. So some of the early credit concerns at the government level have proven to be more worrisome than, as it has turned out. So in 2021 as the economy continues to recover, we think we're going to see improvement, really, in municipal credit quality. Certainly at the government level. Local governments have actually held in okay. They've had elevated expenditures and certainly faced declining local economies, but housing prices have been shooting higher in the United States, and that ultimately should lead to higher property tax revenues over time to local government. So they have some wind at their back, too.
01:31
I would argue the worst challenge in 2020 in muni credit, we found them in the revenue bond sectors. Airports that were suddenly empty, toll roads that were not as frequently traveled, hotel taxes because people weren't going to hotels, plummeted. Those types of bonds, those revenue bonds, that are backed by a specific revenue stream as opposed to a general obligation of the government, that's where we saw some of the greatest pain, and that's where we saw the weakest performances in the spring of 2020, and those bonds have come roaring back. Optimism for normalization supported by vaccination, and an expanding economy are all expected to be wind at the back of the revenue bond sector too. So on credit, we like munis. Things are improving, markedly. Now on interest rates, as interest rates rise, that's a little bit of headwind to the municipal bond investor. So your overall relative return in muni bond portfolio might look pretty good verses a treasury, but absolute return opportunity? It's still pretty low. It has a role in your portfolio, especially for highly taxed individuals, taxes are probably going up with all democratic control of Washington, so investor demand remains strong. But in terms of absolute returns, we think it will be somewhat muted, but the tax benefits, the safety improving credit quality, those are things to be happy about in muni land for 2021.
02:47
Disclosure: Views are as of Jan. 14, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. Municipal bond income may be subject to the federal alternative minimum tax (AMT) and state and local taxes. Federated Investment Management Company 21-40021 (1/21)
Tags Fixed Income . 2021 Outlook .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Depending upon the municipal bond portfolio, Income may be subject to the federal alternative minimum tax and state and local taxes.

Federated Investment Management Company