Jim Murphy and Charlie Hill: ‘The Value Proposition for Municipal Bonds Has Rarely Been Stronger’
Nov 12, 2024
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Jim Murphy, a high-yield muni strategies expert at T. Rowe Price, and Charlie Hill, who manages several short and intermediate-term municipal funds, discuss the current landscape of municipal bonds. They dive into recent market turbulence and highlight how a 50 basis point rate cut could create new investment opportunities. The duo analyzes credit spreads, emphasizing the resilience of not-for-profit hospitals post-COVID, and explore the potential of high-yield municipal bonds in diversifying portfolios while maintaining low default risks.
The municipal bond market is stabilizing with historically high yields and strong credit quality, driven by effective federal support for local governments.
Professional management of municipal bonds is advantageous for investors as it provides better risk management and tax efficiency compared to holding individual bonds.
Deep dives
Market Volatility and Recovery in Municipal Bonds
The municipal bond market has experienced significant volatility over the past few years, particularly influenced by events such as the pandemic and subsequent interest rate hikes. Prior to 2020, the market was relatively calm, characterized by low rates and narrow quality spreads, which shifted dramatically as COVID-19 hit, resulting in a flight to safety. The Federal Reserve's actions post-COVID helped restore confidence and led to a robust recovery in 2021, but 2022 brought another reset in interest rates in response to inflationary pressures. As of 2024, the market seems to be stabilizing, with current rates at a 10 to 15 year high and strong credit quality among issuers, largely due to federal support that helped local governments maintain healthy fiscal conditions.
Impact of Recent Rate Cuts on the Muni Yield Curve
A recent 50 basis point rate cut has affected the municipal yield curve, which had been inverted for shorter-term bonds, with money market investments yielding more than longer maturities. Although some inversion has diminished, the curve remains steep, offering opportunities for significant yield differentials between short and long-term bonds. The immediate impact of the rate cut resulted in a decrease in overnight municipal rates, although interest rates have since fluctuated again following recent economic reports. Overall, while short-term rates were adjusted downwards, the medium to long end of the curve retains a historically steep profile, indicating potential value for investors.
Research Strategies in the Fragmented Muni Market
Navigating the complex municipal bond market, characterized by a large number of small issuers and varying degrees of disclosure, requires a robust credit research approach. Active management is crucial as it allows for the identification of opportunities through diligent analysis and direct interaction with municipal management teams. A bottom-up research strategy helps investors uncover high-quality credits that might be overlooked in a fragmented market, thus enhancing the potential for better yields. Successful investment in this space relies heavily on the combination of quantitative data and qualitative insights derived from on-the-ground research.
Institutional versus Individual Bond Investments
Investors often face a choice between individual municipal bonds and professionally managed bond funds, with numerous benefits tied to opting for professional management. By utilizing managers, investors gain holistic oversight on their portfolios, which helps mitigate risks associated with interest rates and credit quality. Furthermore, professional managers frequently execute tax-loss harvesting strategies that individual investors may overlook, thereby providing additional tax efficiency. Ultimately, while holding individual bonds may appear favorable for some, the advantages of professional management include enhanced risk management, credible credit research, and strategic tax benefits that can yield higher long-term returns.
Our guests this week are Jim Murphy and Charlie Hill of T. Rowe Price’s Municipal Bond Investment Team. Jim leads the team and is portfolio manager for several high-yield muni strategies. Charlie, who has been at T. Rowe since 1991, manages several short and intermediate term municipal-bond funds. Morningstar’s manager research team rates T. Rowe Price’s municipal bond capability highly with several strategies carrying Gold medalist ratings.
