Text on screen: Quick Takes: A Look at Today’s High Yield Muni Market
Text on screen: Rachel Betton, Portfolio Manager, Municipal Bonds
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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
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.
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