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Joseph Deane, Julie P. Callahan, David J. McMahon
In the aftermath of the 2008 credit crisis, the municipal bond market experienced a profound shift in risk dynamics. Today, the municipal landscape is dispersed, fragmented and localized. Assessing creditworthiness and the relative valuations of credit spreads matters more than ever. PIMCO believes this new paradigm has implications both for the composition of the municipal marketplace and the process investors should use to evaluate the opportunities that we see amid the market’s transition.
TransformationIn the years leading up to the credit crisis, the perception of safety in the municipal bond market had driven investors to the point of complacency. This was understandable given the extremely low rate of defaults in the sector and the widespread use of default insurance to enhance the credit quality of new issues. In fact, in each of the five years prior to and including 2007, more than 50% of primary issuance was insurance wrapped. The upshot: The majority of the municipal market was viewed as a rates-based, commodity-like space, with a large portion of the market AAA rated, and the market had very little yield differential for similarly structured securities.
PIMCO believes that this new paradigm has put a premium on credit research for proper bond valuation and protection of principal. We think those investors who can draw on a process that is rich with research resources can find opportunities for attractive return potential.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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