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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 will be a transition year. The path to normalization will be long but ultimately successful.
- The Federal Reserve and U.S. Treasury will work together to support the markets, benefiting municipals.
- Monetary stimulus and low rates are supporting liquidity and economic activity as conditions stabilize. Inflation will remain low as labor productivity increases.
- Treasury yields should increase moderately, but the effect on municipals should be cushioned by yield spreads and the scarcity of tax-exempt bonds.
- The importance of the underlying municipal projects typically stabilizes the underlying credit.
- Downgrades and defaults will be lower than expected, and clarity on credit health will lift investor confidence.
- As we look to the future, the market will focus on the potential for rising tax rates, which should boost demand for municipals.
The evolving fixed income market environment
- Economic growth is expected to be robust this year.
- Global growth is strong, but uneven and led by China and broader Asia.
- Central banks remain extraordinarily accommodative.
- Fiscal policy supports growth.
- We prefer diversified overweight to spread sectors with a focus on mid-quality credit assets.
- Given full valuations, credit selection will be key.
- We advocate deep research and favor idiosyncratic stories with positive long-term growth prospects.
- Declining default forecasts and improving fundamentals should benefit credit sectors.
- Income should drive performance as valuations are unlikely to improve significantly.
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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