The Opportunity For Munis Is Glaring, But Risks Are Present Too

Nov. 23, 2022 9:42 AM ETBBN, HYD, NEA, VCV23 Comments

Summary

  • When 2021 was coming to an end, I was neutral on munis. As we wrap up 2022, I am very bullish.
  • I made a buy case too early this year, there is no getting around that. But I see value at present levels that make me willing to gamble on being fooled twice.
  • The reasons are multi-fold. Yields are relatively high, the sector has seen massive outflows, and state rainy day funds are at elevated levels. All of these support credit prices.
  • This does not mean there are not any risks. A deep recession will pressure state and local government finances.
  • Further, leveraged CEFs are a popular way to play this space and remain at risk of higher interest rates and yield curve inversions.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

Wide shot of woman watching sunrise while sitting poolside at luxury suite at tropical resort

Thomas Barwick

Main Thesis & Background

The purpose of this article is to discuss my macro-outlook for the municipal (muni) bond sector as a whole. This is a broad take on the sector for readers to use to prepare for 2023. This is

Current Muni Yields Compared To A Year Ago

Current Muni Yields Compared To A Year Ago (Bloomberg)

Municipal Fund Flows (in billions)

Municipal Fund Flows (in billions) (Lipper)

Rainy Day Funds (in total)

Rainy Day Funds (in total) (JPMorgan Private Bank)

CPI

CPI (St. Louis Fed)

Q3 Returns (By Sector)

Q3 Returns (By Sector) (World Bank)

Yield Curve

Yield Curve (Charles Schwab)

This article was originally published in the CEF/ETF Income Laboratory on 11/20/22.

This article was written by

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CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

My goal is to help my followers on their investment journey - making informed decisions with a pragmatic approach. I won't pump risky investments nor discuss topics I don't genuinely follow and research. In that spirit, I list my portfolio here for transparency.  

I'm a native New Yorker and I work for a major U.S. bank. I escaped to North Carolina for graduate school and I don't see myself ever leaving. I was a D1 athlete in college (men's tennis) and compete competitively to this day. My Bachelor's and MBA are both in Finance.

Broad market: VOO; QQQ; DIA, RSP

Sectors: VPU / BUI; VDE, RYE; KBWB; XRT

Non-US: EWC; EWU; EIRL; EWA

Dividends: DGRO; SDY, SCHD

Municipals/Debt Funds: NEA, BBN, PDO, PCK, VCV, PML

Stocks: WMT, JPM, MAA, SWBI, MCD, DG, WM

Cash position: 30%

Disclosure: I/we have a beneficial long position in the shares of NEA, VCV, HYD, BBN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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