Viewpoints

Quick Takes: A Look at Today’s High Yield Muni Market

Did you know that 60% of the bonds in the high yield muni index are unrated? Portfolio manager Rachel Betton discusses rising unrated and 144A issuance in the high yield muni market and how qualified investors, like PIMCO, can benefit.

More from this section

Read Transcript

Text on screen: Quick Takes: A Look at Today’s High Yield Muni Market

Text on screen: Rachel Betton, Portfolio Manager, Municipal Bonds

Footer text: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Two pie charts: Title – State/local debt and beyond; Muni market is comprised of 50,000 issuers with a broad set of risk factors. First pie chart: IG Muni Sector Breakdown shows the 11 sub sectors that make up this sector of the muni market. Second pie chart: HY Muni Sector Breakdown shows the 11 sub sectors that make up this sector of the muni market.

Rachel Betton: So a lot of investors are asking about what’s going on in the muni high yield market.

The muni high yield market is approximately 125 billion, with a broad array of sectors represented.

Images: Hospital, school, steel

Before 2010, less than 20 percent of annual issuance going into the high yield index was 144A, or nonrated. In the past decade, these two market segments have grown substantially.

Image of Rachel Betton with text: Almost 25 Percent of HY Index is subject to the qualified institutional buyer designation

So what is a 144A muni bond? the designation attempts to capture a sophisticated investor, and most transactions require buyers to sign an investor letter that states that they've conducted their own credit work, and they're a qualified investor under rule 144A.

Image of Rachel Betton with text: Non-Rated Bonds: Almost 60% of the high yield index is unrated

Nonrated bonds are quite literally not rated by raising agencies. In both areas of the markets, we have seen a yield pickup versus more on-the-run high yield muni bonds.

Spilt screen image  of Rachel Betton and text: Smaller buyer base, Credit complexity

There are two main reasons for this yield differential: a smaller buyer base, and credit complexity. With regards to the smaller buyer base, investors may be compensated for the diminished liquidity associated with fewer potential buyers

Bar chart: Title – Rising unrated and 144A issuance brings opportunity for qualified investors; bars show non-rated, non-144A (blue); Rated, 144A (green) and Non-rated, 144A (orange) issuance from 2005- 2020. Chart makes clear that non-rated 144A issuance has grown enormously since 2014, and non-rated, non-144A issuance has also grown over the same period in smaller amounts.

Most of the 144A bonds in the high yield index have been issued in the past 5 years, and despite a slowdown in these types of bond issuances in the first half of last year, which, obviously impacted the annual numbers, this year, the breakdown is setting up to look much more like 2019, with over 50 percent of the transactions entering the high yield index since the beginning of the year, only available to accredited investors.

Image of Rachel Betton with text: Key Takeaways: Size risk appropriately in daily liquidity vehicles

So, what are the key takeaways for investors? Given the liquidity profile of many 144A and unrated issuances, sizing risk appropriately in daily liquidity vehicles is key.

Image of Rachel Betton with text: Key Takeaways: Unrated and qualified investor bond investors could be well positioned to tap potential benefits.

Finally, with the issuance of unrated and qualified institutional buyer designated bonds likely to keep climbing, investors who are able to both access these bonds and appropriately evaluate their credit risks may well-positioned to tap their potential benefits.

Text on screen: For more information, visit pimco.com/munis

Full page graphic: PIMCO 50, 1971 to 2021       

Disclaimer – Recorded on May 13th, 2021

Disclosure


All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax; a strategy concentrating in a single or limited number of states is subject to greater risk of adverse economic conditions and regulatory changes.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2021, PIMCO

CMR2021-0526-1663917

Filters: Reset All

Filters

Close Filters Dropdown
  • Tags

    Reset

    Close
  • Category

    Reset

    Bond by Bond
    Careers
    Economic and Market Commentary
    Investment Strategies
    PIMCO Foundation
    PIMCO Education
    View from the Investment Committee
    View From the Trade Floor
    Viewpoints
    Education
    Close
  • Order By

    Reset

    Alphabetical
    Most Recent
    Close
() filters applied

Multimedia Finder

Filter By:
  • Bond by Bond
  • Careers
  • Economic and Market Commentary
  • Investment Strategies
  • PIMCO Foundation
  • PIMCO Education
  • View from the Investment Committee
  • View From the Trade Floor
  • Viewpoints
  • Understanding Investing
  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • K
  • M
  • N
  • P
  • R
  • S
  • T
  • V
  • W
  • Z
Clear
Berdibek Ahmedov
Product Strategist
Robert Arnott
Founder and Chairman, Research Affiliates
Andrew Balls
CIO Global Fixed Income
Rachel Betton
Justin Blesy
Asset Allocation Strategist
Meredith Block
ESG Research Analyst
Allison Boxer
Economist
David L. Braun
Portfolio Manager
Jelle Brons
Portfolio Manager, Global and U.S. Investment Grade Credit
Nathaniel Brown
Director of the PIMCO Foundation
Erin Browne
Portfolio Manager, Asset Allocation
Grover Burthey
Portfolio Manager, ESG
Libby Cantrill
U.S. Public Policy
Kenneth Chambers
Fixed Income Strategist
Stephen Chang
Portfolio Manager, Asia
Devin Chen
Portfolio Manager, Commercial Real Estate
Richard Clarida
Global Economic Advisor
Mathieu Clavel
Portfolio Manager, Alternative Credit
Tony Crescenzi
Portfolio Manager, Market Strategist
Harin de Silva
Portfolio Manager, Special Situations
Pramol Dhawan
Portfolio Manager
Matt Dorsten
Portfolio Manager, Quantitative Strategy
Jason Duko
Portfolio Manager
Devin Ekberg
Senior Consultant, Advisor Education
David Forgash
Portfolio Manager
Preeyam Gandhi
Strategist
Max Gelb
Product Strategist
Nick Granger
Portfolio Manager, Quantitative Analytics
Adam Gubner
Portfolio Manager, Distressed Debt
Bill Gurtin
Gregory Hall
Head of U.S. Global Wealth Management
David Hammer
Portfolio Manager
Daniel H. Hyman
Portfolio Manager
Daniel J. Ivascyn
Group Chief Investment Officer
Henry Kao
Account Manager, Stable Value
Mark R. Kiesel
CIO Global Credit
Erica Kinsella
Product Strategist, ESG Strategies
Sean Klein
Head of Client Business Strategy – Client Solutions and Analytics
Kristofer Kraus
Portfolio Manager
Brian Kyle
Global Wealth Management
Jason Mandinach
Head of Alternative Credit and Private Strategies
Kyle McCarthy
Alternative Credit Strategist
Lalantika Medema
Alternative Credit Strategist
Vidur Mehra
Product Strategist
Mohit Mittal
CIO Core Strategies
John Murray
Portfolio Manager, Global Private Real Estate
John Nersesian
Head of Advisor Education
Roger Nieves
Prashant Pandey
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Christina Pihos
Defined Contribution Marketing
Gavin Power
Chief of Sustainable Development and International Affairs
Chitrang K. Purani
Lupin Rahman
Portfolio Manager
Graham A. Rennison
Quantitative Portfolio Manager
Antonese Robertson
Global Wealth Management
Steve A. Rodosky
Portfolio Manager
Emmanuel Roman
Chief Executive Officer
Jerome M. Schneider
Portfolio Manager
Marc P. Seidner
CIO Non-traditional Strategies
Emmanuel S. Sharef
Portfolio Manager, Asset Allocation and Multi Real Asset
Greg E. Sharenow
Portfolio Manager, Commodities and Real Assets
Kimberley Stafford
Global Head of Product Strategy; Responsible for Sustainability Oversight
Jason R. Steiner
Portfolio Manager, Private Lending and Opportunistic Strategies
Christian Stracke
President, Global Head of Credit Research
Richard Thaler
Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago's Booth School of Business
François Trausch
CEO and CIO of PIMCO Prime Real Estate
D. Alan Trice
Matt Tuten
Portfolio Manager
Chad Van Dyk
Global Wealth Management
Megan Walters
PIMCO Prime Real Estate
Qi Wang
CIO Portfolio Implementation
Jamie Weinstein
Portfolio Manager, Corporate Special Situations
Paul-James White
Portfolio Manager
Tiffany Wilding
Economist
Jerry Woytash
Portfolio Manager, Short-Term Desk
Kirill Zavodov
Portfolio Manager, Real Estate
Mike Cudzil
Portfolio Manager
Chris Brightman
Chief Executive Officer and Chief Investment Officer, Research Affiliates
PIMCO
Ryan Mulvey
Strategist
Ben Bernanke
Chair, Global Advisory Board
Seray Incoglu
Portfolio Manager, Commercial Real Estate
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
RAE Strategies: Redefining Active Value Investing
Capitalizing on Diverging Global Economies
Positioning Portfolios Across Global Asset Classes (video)
Yield Matters: A Fresh Look at Core Bonds
Get Ahead: Term Out Your Assets (video)
Preparing for Diverging Economic Paths (video)

Load more results Load {{cCtrl.fetchResults}} more results