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Chart talk: Opportunities in municipal bonds and global fixed income
The what, why and how of the municipal and global fixed income markets
Themes/predictions for 2021
Municipal bond market
- 2021 is a transition year. The path to normalization is here and we expect it will ultimately be successful.
- The Federal Reserve and U.S. Treasury continue to support the markets, benefiting municipals.
- Monetary stimulus and low rates are boosting economic activity as conditions continue to stabilize.
- Treasury yields have increased moderately. Technical factors and potential policy changes damp municipal bond sensitivity to rising rates.
- The essential nature of municipal projects proved to be a stabilizing factor throughout the pandemic.
- All sectors have been put on stable to improving outlooks. Overall credit has improved and should lead to more upgrades than downgrades.
- Volatility around tax changes and the infrastructure program will be the focus of the municipal market for the balance of the year.
The evolving fixed income market environment Key 2021 themes
- Robust U.S. economic growth continues.
- Global growth broadens as Europe and emerging markets improve.
- Central banks remain accommodative, but reducing extraordinary measures.
- Fiscal policy supports growth, but set to fade.
- Prefer diversified overweight to spread sectors with a focus on mid-quality credit assets.
- Given full valuations, credit selection will be key.
- Advocate deep research, favoring idiosyncratic stories with positive long-term growth prospects.
- Declining default forecasts and improving fundamentals benefit credit sectors.
- Income to drive performance as valuations are unlikely to significantly improve.
Finding opportunities in fixed income markets can be challenging. Unless you know where to look. Download our key municipal and global fixed income charts to learn more.
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A word on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Asset-backed and mortgage-backed securities are subject to additional risks such as prepayment risk, liquidity risk, default risk and adverse economic developments. The value of convertible securities may decline in response to such factors as rising interest rates and fluctuations in the market price of the underlying securities. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk.
Investors should contact a tax professional regarding the appropriateness of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
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