When Sellers Present Buyers With a Muni Opportunity

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<h3>James A. Klotz</h3>

James A. Klotz

It’s happening again: A “selling rampage” is affecting the municipal bond market and it has nothing to do with credit quality.

The last time it occurred, at the beginning of the pandemic, we pointed it out (“Coronavirus Fallout and the Municipal Bond Market”). Today, we’re seeing it again.

The most recent event was last Monday. U.S. Treasuries experienced a significant selloff as stocks began to sink. Many investors, in turn, blindly sold their bonds.

When sellers present buyers with a muni opportunity

“This particular move and really, the pain we’ve had since the start of the year, is unfortunate for this market because it is not based on the asset class itself,” an industry strategist told The Bond Buyer.

“It’s an all-out selling rampage out there and munis are being swept along,” he said.

Identifying a muni opportunity

It’s not the first time we’ve identified (and brought to light) periods of irrational selling and special opportunities for investors.

Back in 2008, amid major turmoil in the stock and commodities markets, scary headlines emerged regarding bond insurers. Institutional investors sold but fundamentally, municipal bonds continued to perform well (“What’s Up With My Market Values?”).

In late 2010, technical factors affecting the supply and demand dynamic led to similar bargains in the municipal bond market (“Muni Bond Opportunity Gaining Notice”).

A few years later, we noted the Chicken Littles clucking again (“Good News: ‘The Sky is Falling’”). Investors, they exclaimed, should sell their bonds in the wake of the Fed’s plan to slow its asset purchases. To us, this was the ideal time to look beyond the headlines and run counter to the crowd.

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    More recently, prior to the outbreak of the coronavirus outbreak, there was a stampede of muni investors into the market. As the pandemic unfolded, however, they did a U-turn without much forethought. Upon their exit, other investors who understood history identified distinct value in the market and took advantage of it.

    The market environment now

    Today we’re seeing a similar scenario.

    In 2021, investors plowed a record-breaking $96.8 billion into municipal bond mutual funds and ETFs. Earlier this year, however, choppy waters in the markets spurred some investors to ease their holdings. Now, as muni yields are climbing and stocks are being decimated, they are rethinking that position.

    Recently, the tax-equivalent ratio of 30-year, AAA-rated munis to 30-year Treasuries was a whopping 161% for investors in the highest tax bracket. Of particular value are bonds on the long end of the market, the sweet spot for buy-and-hold muni investors.

    Amid this environment, a raft of bonds are maturing or will be called this summer. Redemptions, estimated at $114 billion, should exceed new issues by about $27 billion during the months of June through August, according to Bloomberg.

    How will investors respond to their redemptions?

    We know that successful, longtime municipal bond investors base their decisions on facts, not emotions.

    They find value in all market environments and are also able to identify and take advantage of particular muni opportunities when they arise. And as always, they focus on keeping their interest clock ticking.

    James A. Klotz

    President

    James A. Klotz is the President of FMSbonds, Inc.
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    Jun 17, 2022

    Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.