Tax-free municipal bond investors earned positive returns in the past three months ending June 30th. Once again, it was shorter-maturity bonds that outperformed, as tariff-related inflation concerns kept longer-maturity bond performance in check. Relentless heavy new issue municipal bond supply has kept the asset class historically cheap versus taxable bonds, especially so in longer-maturity debt. Credit quality in the municipal bond market has been relatively stable, with higher education debt the one sector that is seeing some spread widening due to policies coming out of Washington, D.C. Changes are underway in the higher education sector that could create more financial pressure on these entities. However, it is also possible to find some fine colleges and universities with yields approaching 5 percent. Therefore, with some excellent “bottom up” credit research, total-return opportunities in this sector seem quite attractive on a longer-term investment horizon.
A bit of a sideshow has developed about what to do with the Federal Funds Rate. President Trump has publicly attacked Federal Reserve chairman Powell on his reluctance to lower interest rates. While historically these “debates” usually occur behind close doors, it strikes us that the likely outcome is for interest rates to remain unchanged so that the Federal Reserve is seen as not bending to the demands of the president. This result would be favorable for longer-maturity debt, as policy will be perceived by bond investors as “tight.” With that in mind, we are quite favorable to the relative performance possibilities further out the yield curve, and we would encourage investors to extend portfolio duration at this time.
Moving forward, the technical condition of the municipal bond market should remain favorable in the short term. Excellent absolute yield opportunities exist in the twelve- to fifteen- year area of the municipal bond curve, so expect to see us add to portfolios for clients in our “Enhanced” and “Intermediate” strategies.
Regards,Michael Pietronico
Chief Executive Officer
Miller Tabak Asset Management
mpietronico@millertabak.com
www.millertabakam.com
(212) 850-8103
Twitter (“X”): @MillerTabak