2020 Outlook: Municipal Fixed Income

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Craig R. Brandon, CFACo-Director of Municipal Investments, Eaton Vance Management

      Boston - For municipal bonds in 2020, some of the biggest investment themes are likely to be muni technicals.


      Since the tax act in 2017, we've had a lot of wind at our backs in the municipal space — both creating more demand for muni bonds and also limiting supply.

      Credit spreads have been very narrow in the muni market, historically narrow. And the muni yield curve has also been narrow.

      Diversifying our bets in a flat rate environment

      What we're doing is trying not to make a huge duration1 bet and trying to spread out our investments over a number of different themes — looking for different trades that can help to add both income and alpha,2 in an interest rate environment that might be a little more flat than last year.

      As European rates drift slightly higher this year, I think you might see US rates drift higher. But with the US economy remaining relatively strong with low inflation, I don't think there's a risk of significant rate increases in the US.

      In the muni world, what you're playing is small ball: 10 basis points (bps) a month versus your peer group — 120 bps a year — could put you near the top of your peer group consistently. And I think that approach has helped us get to where we are today.

      Trading opportunity in taxable muni debt

      For example, issuers last year realized that you could refinance tax exempt debt with taxable debt. So you saw taxable issuance last year about double.

      If interest rates stay close to where they are, or only slightly higher, you could see a significant amount of taxable municipal debt come again this year. For us, I think that would be a significant opportunity to trade.

      Bottom line: Even though these new muni refinancings are taxable, we're looking at them as a total return vehicle that some of our other competitors may not be using.