EV Forward - Mid-Year Outlooks From Eaton Vance Managers

Jul. 16, 2020 1:28 PM ET

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Portfolio Strategy

Seeking Alpha Analyst Since 2015

Basic asset management is fine for basic investment needs. But when you need a more sophisticated approach, look to Eaton Vance for advanced investment and wealth management solutions. Through five investment affiliates, we offer active, passive, rules-based and responsible investing strategies that go beyond traditional, mainstream products.

Summary

The second half of 2020 may reconcile the market’s stimulus-fueled optimism with more somber assessments of the pandemic’s economic damage.

Summary

In the first half of 2020, COVID-19 forced the world to cope with a dramatic confluence of health, economic and social challenges. The shock to the financial markets was met decisively with massive policy actions from central banks, prompting a remarkable recovery in all asset classes from March lows. In contrast, the political and social responses, including lockdowns, contact tracing, mask wearing and economic reopenings varied widely around the world. The second half of the year is likely to bring more clarity about how and when the market’s stimulus-fueled optimism will be reconciled with a more somber assessment of the pandemic’s unprecedented economic damage.
Investment teams across Eaton Vance’s range of affiliate managers seek to actively capitalize on opportunities presented by a shifting market climate, while ensuring that the portfolio risk profile remains appropriate for the specific strategy.
Eaton Vance strategies are designed to seek fundamental value that helps build client wealth over the course of many business cycles. In our view, times like these underscore the value of active management. We believe in carefully assessing the dynamics of fluctuations driven by political change or other disruptions, and in taking action that best serves the long-term interests of our clients.

Contents

COVID-19 Update

Marshall L. Stocker, PhD, CFA Director of Country Research...................................2

US Employment Overview

Andrew Sczcurowski, CFA Portfolio Manager..........................................................4

Equity Markets

Edward J. Perkin, CFA Chief Equity Investment Officer ..............................6

Income Markets

Eric Stein, CFA Co-Director of Global Income ..................................7

Equities

US Small-Cap Equities J. Griffith Noble, CFA Co-Director of Small-Cap Equity, Portfolio Manager..........................................................8
International Equities Christopher M. Dyer Director of Global Equity............................................9
Global Small-Cap Equities Aidan Farrell Director of Global Small-Cap Equity....................10

Income

Floating-Rate Loans Ralph Hinckley, CFA Portfolio Manager, Senior Research Analyst.............................................11
Global High Yield Bonds Jeffrey D. Mueller Co-Director of High Yield Bonds, Portfolio Manager.........................................................12
Municipal Bonds Craig R. Brandon, CFA Co-Director of Municipal Investments..................13
Municipal Bond Ladders Nisha Patel, CFA Director, Portfolio Management............................. 14
Emerging Markets Debt Michael A. Cirami, CFA Co-Director of Global Income..................................15

COVID-19 UPDATE

Marshall L. Stocker , PhD, CFA Director of Country Research Eaton Vance Management

US sets exit from the World Health Organization amid surging infection rates

Health policy developments

The Trump administration gave the required one-year notice for the US to quit the World Health Organization. Democratic candidate Joe Biden said the US would rejoin the WHO on his first day as president.
The US federal government plans virus testing surge. Temporary testing sites will each perform as many as 5,000 free tests a day. The sites will remain open for up to 12 days and are currently targeting Louisiana, Texas and Florida.
The Boston Herald reports the Trump administration is moving to expel foreign students from the US this fall if their colleges or universities opt for online learning only. “Students attending schools operating entirely online may not take a full online course load and remain in the United States,” US Immigration and Customs Enforcement announced in a press release. Approximately 1.1 million foreign students study in the US.
Texas has issued a statewide mask requirement for indoor spaces, except for churches. The order specifies that the mask must be worn over both the nose and mouth.
Citigroup executive expects the firm to cap office capacity at 40% until a vaccine is available.
New York partygoers received subpoenas after stonewalling COVID-19 contact tracers.

Bearish virus developments

Dr. Fauci said vaccines will only provide "finite" protection to COVID-19 and that booster shots will likely be necessary. He was not sure how frequently boosters would be required.
Epidemiologist Michael Osterholm mentioned in his weekly podcast that his group’s study of public gatherings indicates 26% of mask wearers incorrectly wear their mask below the nose, covering the mouth only. “It’s like fixing 3 of the 5 screen doors on your submarine.”
At least 66 University of Washington fraternity members have tested positive for COVID-19: 62 house residents and four who don't live in the house. The university had already reduced occupancy limits in fraternities by 50%.
Despite an open letter to the WHO signed by 239 scientists in 32 countries stating that aerosol transmission exists, the WHO’s technical lead on infection control said the evidence of aerosol transmission remains unconvincing. Later, WHO acknowledged "emerging evidence" of airborne spread of COVID-19 and will release a briefing updating their views.
India now has the third most cases in the world. Plans to reopen the Taj Mahal have been postponed.
Florida’s positivity rate for COVID-19 tests continues to climb, suggesting the outbreak is not under control. Fifty-four Florida hospital intensive care units (ICUs) across 25 counties have reached capacity. Statewide, only 17% of the total 6,010 adult ICU beds were available on Tuesday.
Contact tracing is no longer possible across the US South and Southwest because of how fast cases are rising.

Bullish virus developments

Scientists continue to debate COVID’s infection fatality rate. After the WHO held a two-day online meeting of 1,300 scientists from around the world, the WHO’s chief scientist said the consensus for now is that the infection fatality rate (IFR) is 0.64%.
Yale University study published in JAMA estimates that US COVID-19 deaths are 28% higher than official counts (through May 30). The researchers’ opinion is based on a close examination of "excess deaths." This figure is LOWER than estimates in other countries.
Development of inexpensive at-home COVID-19 tests is progressing with some already in trials. The cost could be $1 to $5 per test claim Harvard and Boston University professors, compared to $50 to $150 for PCR tests currently used in medical settings.
Dermatologists report being inundated by patients with "COVID toe." Called chillblains, painful swollen toes indicate inflammation in small blood vessels. So far the condition seems benign and mostly appears in otherwise asymptomatic patients. Federal health officials have yet to classify chilblains as a COVID-19 symptom.
The number of US states with accelerating new case growth rates has slowed to 22, from a high of 31 states on June 29. However, the US again broke its record for new daily cases on July 7, adding more than 60,000 new cases.

Economic and market impacts

Bloomberg reports “more than 40% of adults say they will cut back on some of the very discretionary spending needed by struggling retailers."
Economic activity in parts of the US is showing signs of leveling off amid a resurgence in COVID-19 cases, according to Federal Reserve Bank of Atlanta President Raphael Bostic. “There are a couple of things that we are seeing and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise,” Bostic said.
In response to low oil prices and the pandemic-related economic slowdown, the UAE announced Sunday what the Financial Times labeled an “ambitions government restructuring.” Fifty percent of government service centers will be eliminated to become digital and 50% of federal authorities will be merged.
Greece PM says won't accept strict EU conditions on COVID-19 aid.
Fujitsu announced it will halve its office space in Japan after announcing a permanent work-from-home plan. Employees will primarily work on a remote basis, and staff will be allowed to choose where they work.

EMPLOYMENT OVERVIEW

Andrew Szczurowski , CFA Portfolio Manager Eaton Vance Management

Digging further out of the hole with the June jobs report

For the second straight month, the jobs report surprised to the upside. The US economy added 4.8 million jobs in June, beating the 3.2 million in gains estimated by economists. We are in unprecedented times, which makes forecasting economic data mostly a crapshoot.

Payroll numbers in 2020 are so far outside the historical norm: Going back to 1960, there were only three months with job gains more than 500,000, and never a month with more than 800,000 job losses. This year, however, the US economy lost nearly 21 million jobs in April and gained close to 5 million jobs last month.

We only point this out because US payrolls still have to add back another 14.6 million to return to where we were in February. Now we are in the initial bounce, the easiest phase of the economic recovery. What is still unknown is how sharp the rest of the rebound will be and where employment will eventually settle.

Monitoring the permanently unemployed

While the headline number was better than expectations, there was one glaring negative in the report that bears watching over the coming months — the number of permanently unemployed, who won’t have their jobs waiting for them when normalcy resumes. Unfortunately, that number is likely to keep growing as the stimulus measures wear off.

In June, there were 588,000 workers who lost their job permanently. Since February, the total is 1.6 million, or just over 1% of the labor force. If everyone else who was temporarily unemployed got their jobs back tomorrow, the jobless rate would still be more than 1% higher than before the coronavirus — not even factoring in all the recent grads and other entrants into the labor force. We think this will be the most important number to monitor, as it will give us an early idea of where the unemployment rate may end up.

Other details of the US employment situation

Average hourly earnings fell 1.2% month over month, as low wage workers were added back into the labor force. Remember that this number actually spiked in March and April because low wage workers were hit hardest with job losses, which inflated the gain in average hourly earnings. With the labor market healing over the coming months as service sector jobs return, look for average hourly earnings to continue to decline.

The unemployment rate fell from 13.3% to 11.1% — beating economist estimates of a decline to 12.5% — but is still 7.6 percentage points above where it was in February. The underemployment rate, which includes those not working at full capacity, has come down to 18%, 11 percentage points above February. While the decline in unemployment is certainly welcome news, Federal Reserve policymakers aren’t expecting the rate to decline at this pace for much longer, as they project a 9.3% jobless rate at year end.

Sectors and industries on the rebound

Naturally, sectors that lost the most jobs have gained the most back over the past two months. Bars and restaurants led the way in June, adding roughly 1.5 million jobs, but still sit more than 3 million jobs below February’s level. Overall, the retail trade sector added 740,000 jobs, as reopening plans were progressing through most of the country in mid-June, when the payroll survey was conducted.

Though employment in education and health services increased by 570,000, that is still 1.8 million below February. By contrast, the manufacturing sector added over 350,000 jobs in June to move just 750,000 jobs short of February’s count. As we’ve said before, the pandemic-related shutdowns hit the service sector much harder than manufacturing.

Outlook for the US labor market

It is great to see the labor market bounce back sooner than expected. However, it is far too soon to declare victory. The labor market recovery could get more difficult over the coming months. If businesses aren’t able to operate at 100% capacity, they likely won’t need 100% of their prior workforce to return.

It will also be tricky to forecast jobs over the coming months if we continue to have coronavirus clusters pop up in various parts of the country, causing new restrictions on businesses. In next month’s jobs number, we could have large economic centers like New York City enter more lax reopening phases, which should boost employment, while others like Texas and California have to halt and roll back some of their reopening plans.

In the meantime, the weekly jobless claims numbers will give us a better idea of how much progress the labor market recovery continues to make.

EQUITY MARKETS

Edward J. Perkin , CFA Chief Equity Investment Officer Eaton Vance Management

Prudent investors should be well served by balance and diversification

As we enter the second half of what is arguably the strangest year of our lifetimes, we suspect there are lots of important questions on the minds of investors.
Will the US and global economies be able to continue their rapid reopening? By mid-September, we should know whether children and young adults will go back to school and college, and how many workers will return to reconfigured offices.
Or will a surge in COVID-19 cases force the economy to shut down again? Over the next few months, another wave of coronavirus could emerge along with this year’s flu season.
Who will win the US elections? By November 4, we will know who the next president will be and whether we will have new party majorities in Congress. That will give us a read on the likely fiscal and regulatory policies in 2021 and beyond.
What will the answers to these questions imply for an investor’s asset allocation — stocks versus bonds, growth versus value, large cap versus small cap, US versus international? We think cyclical stocks, traditional value stocks, small caps and international stocks could be the more attractive places to be.
We would also monitor breadth in the stock market, looking for a wider participation of businesses beyond a narrow set of large US technology companies.
Given the binary nature of these potential outcomes, we believe prudent investors should be well served by maintaining balance and diversification in their portfolios: Consider offsetting more pro-risk, pro-cyclical allocations with defensiveness elsewhere — whether that is cash, short-term government bonds or even some gold.

About Risk: The value of investments may increase or decrease in response to economic, and financial events (whether real, expected or perceived) in the US and global markets. The value of equity securities is sensitive to stock market volatility. Investments in foreign instruments or currencies can involve greater risk and volatility than US investments because of adverse market, economic, political, regulatory, geopolitical, currency exchange rates or other conditions.

INCOME MARKETS

Eric Stein , CFA Co-Director of Global Income Eaton Vance Management

Expect central banks, geopolitical issues to drive income markets from here

US Federal Reserve. We're almost three months removed from the depth of the financial panic related to COVID-19, where the Fed’s primary focus was on market functioning. Mission largely accomplished. A few markets still need some help, but the Fed's been very successful in getting markets to function better. Looking to the second half of 2020, I expect the Fed to focus on economic growth and getting inflation up to its target. So I expect the Fed to use a combination of yield-curve control, forward guidance and open-ended quantitative easing.
European Central Bank. The ECB had a slow start when the financial panic related to COVID-19 hit. However, they’ve come on strong recently with their PEP program — or Pandemic Emergency Purchase program — where they've recently increased the size of that. So a lot of monetary stimulus in Europe. In addition, on the fiscal front, a Franco-German agreement around increased coordinated fiscal spending in Europe and joint issuance is gaining momentum. Some are calling it Europe's Hamiltonian moment. I don't know if I'd go that far, but I do think it’s progress in the right direction.
Geopolitical issues. Markets were so focused on COVID-19 in March, April and May that to some extent, they started to forget some of these issues. But the US-China relationship, China-Hong Kong, Brexit and the EU — as well as the upcoming US election — are all issues I expect the markets to focus on in the second half of 2020.
Opportunities ahead. We have seen a broad rally across all markets in the world during the past month or two. Emerging markets have been no exception. But they generally lag developed market fixed income markets and developed market equities. And so, with monetary stimulus from the Fed, ECB and emerging market central banks, as well as a better fundamental backdrop than we had a couple of months ago, I think emerging market assets are a good place to be.

About Risk: An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. As interest rates rise, the value of certain income investments is likely to decline. Investments involving higher risk do not necessarily mean higher return potential. Diversification cannot ensure a profit or eliminate the risk of loss. Debt securities are subject to risks that the issuer will not meet its payment obligations. Low rated or equivalent unrated debt securities of the type in which a strategy will invest generally offer a higher return than higher rated debt securities, but also are subject to greater risks that the issuer will default. Unrated bonds are generally regarded as being speculative. In emerging market countries, the risks may be more significant in regards to sensitivity to stock market volatility, adverse market, economic, political, regulatory, geopolitical and other conditions.

US SMALL-CAP EQUITIES

J. Griffith Noble , CFA Portfolio Manager Co-Director of Small-Cap Equity Eaton Vance Management Calvert Research & Management

Significant opportunity remains in the "quality" small-cap space

It's been a remarkable year for small-cap equities thus far, with the largest and fastest sell-off in history followed by a record rebound, driven by micro caps and lower-quality companies.
Volatility has been uneven across the small-cap space and relative opportunities have emerged. To date, small-cap growth has significantly outperformed value for the fifth straight year, with valuations close to tech-bubble levels.
As a result, we think high-quality small caps are starting to look very attractive, particularly from a historical perspective.
Businesses create value for shareholders by generating strong return on capital. We believe the market will go back to rewarding companies with stronger return metrics that may also offer a measure of downside protection.
We believe the market’s recent run up warrants caution, and five things we're monitoring closely are:
- Whether the massive fiscal and monetary programs currently propping up the US economy can be converted to self-sustaining growth
- High leverage and corporate debt
- US presidential election
- Valuations — we see tech and health care as key areas of risk
- Trajectory of the coronavirus and governmental and consumer responses
In this environment, we think it’s more important than ever to focus on high-quality, sound businesses. We believe our emphasis on downside protection and disciplined application of (Q)uality, (V)aluation, and (T)ime should position us for strong relative performance throughout shifting market environments and cycles.

About Risk: The value of investments may increase or decrease in response to economic, and financial events (whether real, expected or perceived) in the US and global markets. The value of equity securities is sensitive to stock market volatility. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, more established companies.

INTERNATIONAL EQUITIES

Christopher M. Dyer , CFA Director of Global Equity Eaton Vance Advisers International Ltd. Calvert Research & Management

Multiple factors, including greater European cohesion, favor international equities

Looking ahead, we think international equities are attractive from economic, political and valuation perspectives, relative to US equity markets.
From an economic standpoint, we think we are at the early stage of recovery, which would favor the cyclical and value-oriented companies we see in Europe and in Japan.
From a political perspective, we believe volatility in US equity markets will increase as the November US presidential election approaches. A Democratic victory would mean a higher probability of increased US corporate tax rates and potentially lower profits.
In contrast, we are seeing greater cohesion in Europe as exemplified by the European Recovery Fund, which has been structured to handle the region’s debt collectively.
In terms of valuation, the Recovery Fund could be an important factor in potentially driving down the equity risk premium in Europe, which has been elevated for nearly the past decade and has depressed company valuations.

GLOBAL SMALL-CAP EQUITIES

Aidan Farrell Director of Global Small-Cap Equity Eaton Vance Advisers International Ltd.

Amid a volatile second half of 2020, we see opportunities in global small caps

The direction of travel for global small-cap equities will depend on the direction of travel with the coronavirus pandemic, or any medical breakthrough in relation to it. One thing for sure, volatility is likely to remain elevated for a number of months to come.
We think the market is ignoring valuation to a large degree and over time, valuation needs to be justified back. Lower-quality companies as measured by return on equity and return on invested capital have rallied too far, in our opinion, over recent months. And those higher-quality companies, which have historically performed better for investors over time, have lagged behind. We think that's an opportunity.
We expect the behavior of consumers — how they spend their discretionary dollars — is changing as they avoid air travel and concerts while also reverting to spending more on e-commerce, staycations and home improvements, for example. These behavioral changes represent an important opportunity as well.
There remain many risks in the world today and we need to be conscious that in the second half of the year, a number of fiscal stimulus measures will start rolling off and consumers may feel the pain of that.
We continue to do what we do throughout the economic cycle, focusing on companies that are in control of their own destiny, as much as possible. We do not point our portfolios in one particular market direction or another. We focus on high-quality companies with structural growth, tailwinds and characteristics consistent with our investment philosophy, which is quality, valuation and time (QVT).

FLOATING-RATE LOANS

Ralph Hinckley , CFA Portfolio Manager Senior Research Analyst Eaton Vance Management

Loan market offers value, but manager experience is crucial

For the second half of 2020, we expect floating-rate loan prices to continue to rise, as they have done since hitting their March lows, but there are likely to be starts and stops along the way.
As the true economic impacts of the COVID-19 pandemic play out over the next several months, we expect the default rate to rise, perhaps mid- to upper-single digit defaults for the remainder of 2020, followed by a low single digit rate next year.
Over the three-year period beginning with the 2008 global financial crisis, the cumulative default rate was about 15% — we anticipate that the figure will come in a bit under that. However, recent loan pricing implies a default rate of about 30% — roughly two times the rate that was realized during the crisis. On that basis, we believe there is value in the loan market.
The need to actively evaluate loans on a case-by-case basis, credit by credit, has never been more crucial. Over the course of a three-decade track record, the Eaton Vance loan team has managed through numerous business cycles and crises, including the dot.com bust, 9/11, the global financial crisis and the oil and gas turmoil of 2015 and 2016.
The pandemic obviously presents a unique set of challenges for the economy, on top of more traditional risk factors like the vagaries of an election year and worsening relations between the US and China. We do not believe there is a more experienced loan management team better equipped to guide clients in this environment than Eaton Vance.

About Risk: The value of investments may increase or decrease in response to economic, and financial events (whether real, expected or perceived) in the US and global markets. Loans are traded in a private, unregulated inter-dealer or inter-bank resale market and are generally subject to contractual restrictions that must be satisfied before a loan can be bought or sold. These restrictions may impede the Strategy's ability to buy or sell loans (thus affecting their liquidity) and may negatively impact the transaction price. It may take longer than seven days for transactions in loans to settle. Due to the possibility of an extended loan settlement process, the strategy may hold cash, sell investments or temporarily borrow from banks or other lenders to meet short- term liquidity needs. Loans may be structured such that they are not securities under securities law, and in the event of fraud or misrepresentation by a borrower, lenders may not have the protection of the anti-fraud provisions of the federal securities laws. Loans are also subject to risks associated with other types of income investments. Investments in debt instruments may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non- payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Investments rated below investment grade (sometimes referred to as "junk") are typically subject to greater price volatility and illiquidity than higher rated investments. As interest rates rise, the value of certain income investments is likely to decline. Investments in foreign instruments or currencies can involve greater risk and volatility than US investments because of adverse market, economic, political, regulatory, geopolitical, currency exchange rates or other conditions. Changes in the value of investments entered for hedging purposes may not match those of the position being hedged.

GLOBAL HIGH YIELD BONDS

Jeffrey D. Mueller Co-Director of High Yield Bonds Portfolio Manager Eaton Vance Advisers International Ltd.

Fundamental research is the key to investing in high yield

This has been a year of significant volatility in the high yield asset class. As we look out over the second half of 2020, we expect that theme of volatility is going to remain.
We’ve been focusing on doing fundamental credit research and reaching out to our portfolio companies to speak with management teams, to get a better understanding of what exactly they are seeing out there in the real world. And we expect that earnings trends will most likely trough in the next couple of quarters.
Parsing through those companies who will have their earnings inflecting and their credit profiles improving, versus those that will remain subdued, is going to be key to unlocking value as we move forward in this market.
We’ve also seen default rates rise, although they’ve remained stubbornly low in Europe. But as we look out to the rest of 2020, we’d expect that default rates will continue to rise and we’ll most likely end the year at or near 10% levels.
We continue to keep a close eye on some of the wider issues in the world that could affect risk markets as we move forward — whether that's the rising tensions between the US and China or the upcoming US presidential election in November. Most importantly, we are tied to the eventual path, depth and duration of the global pandemic that we’re in.
A focus within our high yield strategies remains on building portfolios of individual securities that we expect will help us capture as much of the eventual upside that the current valuation opportunity represents, while avoiding those higher levels of credit impairment that we believe may be yet to come.

About Risk: The value of investments may increase or decrease in response to economic, and financial events (whether real, expected or perceived) in the US and global markets. Investments in debt instruments may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Investments rated below investment grade (sometimes referred to as "junk") are typically subject to greater price volatility and illiquidity than higher rated investments. As interest rates rise, the value of certain income investments is likely to decline.

MUNICIPAL BONDS

Craig R. Brandon , CFA Co-Director of Municipal Investments Eaton Vance Management

Cautiously optimistic about the municipal bond market heading into the fall

After the volatility in the first quarter of 2020, we have seen a very sharp V-shaped recovery for AAA and AA-rated bonds, but not quite the same kind of recovery from bonds rated BBB and below.
We are waiting to see what actual operating results look like — not only for states and localities, but also for colleges and universities, some hospitals and other sectors in our market. Analyzing those actual numbers will give us a little more clarity on where the high yield sector should be.
In our view, we are entering this time period with the wind at our back: Technicals are robust in munis, with strong flows back into the market both in the high quality and the high yield space. Munis are definitely driven by technicals, so this is comforting, and we are also seeing strong coupon reinvestment money right now.
Overall we would say that our outlook for munis is cautiously optimistic through the rest of the year, pending the actual results that we see from some of the borrowers in the municipal market.

About Risk: The value of investments may increase or decrease in response to economic, and financial events (whether real, expected or perceived) in the US and global markets. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Investments in debt instruments may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments.

MUNICIPAL BOND LADDERS

Nisha Patel , CFA Director, Portfolio Management Parametric Portfolio Associates

In a low-yielding environment, we favor the intermediate to long part of the curve

The muni market has seen a tremendous rebound since early March, especially in the high quality space. From here, the outlook will depend upon two key factors: What will flows into the asset class look like, and how much new issue supply will come into the market?
Today’s low absolute yields may give investors pause about adding to their muni holdings now. However, in what may remain a low yielding environment for quite some time, muni valuations remain attractive relative to other fixed income assets.
We currently favor the intermediate to long part of the curve, especially as short maturity yields have plummeted, and the steeper yield curve provides more income to investors.
A recent surge in the issuance of taxable muni bonds has resulted in attractive valuations of taxable muni bonds compared to similarly rated corporate bonds across the yield curve. We think nontraditional buyers will continue looking to this space for more value — especially as the Fed’s secondary market purchases could keep corporate bond deals depressed for a while.
Access to capital markets has also improved significantly since early March, and we expect issuers across all sectors to take advantage of these low financing yields over the next few months.
From a credit perspective, July’s postponed tax payments will indicate what the actual tax revenues will be — and how much of a gap that will create at the state level. Local credits should remain more defensive, as their revenue stream tends to be a bit more resilient thanks to the dependency on property tax collection.
Spreads in highly impacted sectors — such as health care, transit and higher education — have tightened recently, but remain elevated compared to pre-crisis levels. As the recovery continues, we think it will be important to play defense in these sectors, while also looking to identify inefficiencies going forward.

About Risk: The value of investments may increase or decrease in response to economic, and financial events (whether real, expected or perceived) in the US and global markets. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Investments in debt instruments may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments.

EMERGING MARKETS DEBT

Michael A. Cirami , CFA Co-Director of Global Income Eaton Vance Management

Country selection and flexibility are critical to navigating EM debt sector

The emerging market (EM) debt sector experienced dramatic volatility in early 2020, along with the rest of the capital markets, but it has come back in a meaningful way from the March lows. We believe the rally is over, and that we are entering a period of differentiation. How one invests in EM debt is likely to be critically important, and there are three main areas of focus for us.
First, country-level analysis is critical — how each deals with the virus and its economy. Policymakers are trying to maximize economic output while not overrunning their healthcare systems. Unfortunately for EM debt sector, many of the bellwether countries are not handling this well, so it’s important to consider the broadest investment universe possible.
Second, investors should have the flexibility to focus on different EM risk factors, like foreign exchange, local interest rates and sovereign credit. Often, these have very different valuations in the market, so investors should have the ability to allocate to the most attractive factors.
Third, the global economic situation is quite fluid. We recommend not staying wedded to a given investment thesis, simply in the hope that it will play out over the medium- or long-term.

About Risk: The value of income investments may increase or decrease in response to economic, and financial events (whether real, expected or perceived) in the US and global markets. Investments in foreign instruments or currencies can involve greater risk and volatility than US investments because of adverse market, economic, political, regulatory, geopolitical, currency exchange rates or other conditions. In emerging or frontier countries, these risks may be more significant. Investments in debt instruments may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Exposure to derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other investments. As interest rates rise, the value of certain income investments is likely to decline. The value of commodities investments will generally be affected by overall market movements and factors specific to a particular industry or commodity, including weather, embargoes, tariffs, or health, political, international and regulatory developments.

IIndex Definitions

Bloomberg Barclays US Aggregate Index is an unmanaged index of domestic investment-grade bonds, including corporate, government and mortgage-backed securities.

Bloomberg Barclays Municipal Bond Index is an unmanaged index of municipal bonds traded in the US.

Bloomberg Barclays High Yield Municipal Bond Index is an unmanaged index of fixed rate, non-investment grade municipal bonds traded in the US.

Bloomberg Barclays US Corporate Investment Grade Index is an unmanaged index that measures the performance of investment-grade corporate securities within the Bloomberg Barclays US Aggregate Index.

ICE BofA US High Yield Index is an unmanaged index of below-investment-grade US corporate bonds.

ICE BofA US Corporate Index is an unmanaged index that measures the performance of investment-grade corporate securities. S&P/LSTA Leveraged Loan Index is an unmanaged index of the institutional leveraged loan market.

Nasdaq Composite is an unmanaged index of the common stocks and similar securities listed on the Nasdaq stock market.

Standard & Poor’s (S&P) 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of US stock market performance. Russell 1000 Index is an unmanaged index of 1,000 US large-cap stocks.

Russell 2000 Index is an unmanaged index of 2,000 US small-cap stocks. Russell Midcap Index is an unmanaged index of US mid-cap stocks.

MSCI Europe Index is an unmanaged index of equity securities in Europe.

MSCI World Index is an unmanaged index of equity securities in the developed markets.

MSCI World Small-Cap Index is an unmanaged index of global companies having small market capitalizations.

MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder. Unless otherwise stated, index returns do not reflect the effect of any applicable sales charges, commissions, expenses, taxes or leverage, as applicable. It is not possible to invest directly in an Index.

ICE BofA Indexes: ICE® BofA® indices are not for redistribution or other uses; provided “as is”, without warranties, and with no liability. Eaton Vance has prepared this report and ICE Data Indices, LLC does not endorse it, or guarantee, review, or endorse Eaton Vance’s products. BofA® is a licensed registered trademark of Bank of America Corporation in the United States and other countries.

Important Additional Information and Disclosures

Source of all data: Eaton Vance as of July 10, 2020, unless otherwise specified. The opinions expressed are those of the authors as of June 2020.

This material is presented for informational and illustrative purposes only. This material should not be construed as investment advice, a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy; it has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and Eaton Vance has not sought to independently verify information taken from public and third-party sources. Investment views, opinions, and/or analysis expressed constitute judgments as of the date of this material and are subject to change at any time without notice. Different views may be expressed based on different investment styles, objectives, opinions or philosophies. This material may contain statements that are not historical facts, referred to as forwardlooking statements. Future results may differ significantly from those stated in forward-looking statements, depending on factors such as changes in securities or financial markets or general economic conditions.

This material is for the benefit of persons whom Eaton Vance reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of Eaton Vance. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It expresses no views as to the suitability of the investments described herein to the individual circumstances of any recipient or otherwise. It is the responsibility of every person reading this document to satisfy himself as to the full observance of the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country. Unless otherwise stated, returns and market values contained herein are presented in US Dollars.

In the United Kingdom, this material is issued by Eaton Vance Management (International) Limited (“EVMI”), 125 Old Broad Street, London, EC2N 1AR, UK, and is authorised and regulated by the Financial Conduct Authority. EVMI markets the services of the following strategic affiliates: Parametric Portfolio Associates® LLC (“PPA”), an investment advisor registered with the SEC. Hexavest Inc. (“Hexavest”) is an investment advisor based in Montreal, Canada and registered with the SEC in the United States, and has a strategic partnership with Eaton Vance, and Calvert Research and Management (“CRM”) is an investment advisor registered with the SEC. This material is issued by EVMI and is for Professional Clients/Accredited Investors only.

This material does not constitute an offer to sell or the solicitation of an offer to buy any services referred to expressly or impliedly in the material in the People's Republic of China (excluding Hong Kong, Macau and Taiwan, the "PRC") to any person to whom it is unlawful to make the offer or solicitation in the PRC.

The material may not be provided, sold, distributed or delivered, or provided or sold or distributed or delivered to any person for forwarding or resale or redelivery, in any such case directly or indirectly, in the People's Republic of China (the PRC, excluding Hong Kong, Macau and Taiwan) in contravention of any applicable laws.

Eaton Vance Asia Pacific Ltd. is a company incorporated in the Cayman Islands with its Japan branch registered as a financial instruments business operator in Japan (Registration Number: Director General of the Kanto Local Finance Bureau (Kinsho) No. 3068) and conducting the Investment Advisory and Agency Business as defined in Article 28(3) of the Financial Instruments and Exchange Act (as amended) (“FIEA”). Eaton Vance Asia Pacific Ltd. is acting as an intermediary to promote asset management capabilities of Eaton Vance Management (International) Limited and other Eaton Vance group affiliates to registered financial instruments business operators conducting the Investment Management Business, as defined in the FIEA. Eaton Vance Asia Pacific Ltd. is a member of JIAA Japan with registration number 01202838.

In Singapore, Eaton Vance Management International (ASIA) Pte. Ltd. (“EVMIA”) holds a Capital Markets Licence under the Securities and Futures Act of Singapore (“SFA”) to conduct, among others, fund management, is an exempt Financial Adviser pursuant to the Financial Adviser Act Section 23(1)(D) and is regulated by the Monetary Authority of Singapore (“MAS”). Eaton Vance Management, Eaton Vance Management (International) Limited and Parametric Portfolio Associates® LLC holds an exemption under Paragraph 9, 3rd Schedule to the SFA in Singapore to conduct fund management activities under an arrangement with EVMIA and subject to certain conditions. None of the other Eaton Vance group entities or affiliates holds any licences, approvals or authorisations in Singapore to conduct any regulated or licensable activities and nothing in this material shall constitute or be construed as these entities or affiliates holding themselves out to be licensed, approved, authorised or regulated in Singapore, or offering or marketing their services or products.

In Australia, EVMI is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the provision of financial services to wholesale clients as defined in the Corporations Act 2001 (Cth) and as per the ASIC Corporations (Repeal and Transitional) Instrument 2016/396.

In Ireland, Eaton Vance Global Advisors Ltd ("EVGA") is registered in the Republic of Ireland with Registered Office at 70 Sir John Rogerson’s Quay, Dublin 2, Ireland. EVGA is regulated by the Central Bank of Ireland with Company Number: 224763.

In Germany, Eaton Vance Global Advisors Limited, Deutschland (“EVGAD”) is a branch office of Eaton Vance Global Advisors Limited ("EVGA"). EVGAD has been approved as a branch of EVGA by BaFin.

EVMI is registered as a Discretionary Investment Manager in South Korea pursuant to Article 18 of Financial Investment Services and Capital Markets Act of South Korea.

EVMI utilises a third-party organisation in the Middle East, Wise Capital (Middle East) Limited ("Wise Capital"), to promote the investment capabilities of Eaton Vance to institutional investors. For these services, Wise Capital is paid a fee based upon the assets that Eaton Vance provides investment advice to following these introductions.

Eaton Vance Distributors, Inc. (“EVD”), Two International Place, Boston, MA 02110, (800) 225-6265. Member of FINRA/ SIPC. Eaton Vance Investment Counsel. Two International Place, Boston, MA 02110.

Eaton Vance Investment Counsel is a wholly-owned subsidiary of EVC and is registered with the SEC as an investment adviser under the Advisers Act.

Investing entails risks and there can be no assurance that Eaton Vance, or its affiliates, will achieve profits or avoid incurring losses. It is not possible to invest directly in an index. Past performance is not a reliable indicator of future results.

About Eaton Vance

Eaton Vance provides advanced investment strategies and wealth management solutions to forward-thinking investors around the world. Through principal investment affiliates Eaton Vance Management, Parametric, Atlanta Capital, Hexavest and Calvert, the Company offers a diversity of investment approaches, encompassing bottom-up and top-down fundamental active management, responsible investing, systematic investing and customized implementation of client-specified portfolio exposures. Exemplary service, timely innovation and attractive returns across market cycles have been hallmarks of Eaton Vance since 1924.

For further information, please contact:

Eaton Vance Management Two International Place, Boston, MA 02110 800.836.2414 or 617.482.8260 | eatonvance.com Eaton Vance Management (International) Limited 125 Old Broad Street, London, EC2N 1AR, United Kingdom +44 (0)203.207.1900 | global.eatonvance.com

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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