As Goldman Sachs has hiked its probability of a U.S. recession to 45%, the investment bank recommends a shift in client portfolios towards high-quality fixed income, citing resilience in the asset class amid broader stock market volatility.
“If we're going into an economic downturn, higher credit quality and longer duration would benefit in a scenario like that,” said Sylvia Yeh, co-head of municipal fixed income at Goldman Sachs. “Whether it's munis [municipal bonds] or investment grade corporate bonds or others, I think you would actually see money move into those markets and the different vehicles because of recession fears.”
S&P Global’s Municipal Bond Index is down 0.87% so far this year, while Bloomberg’s index for 10-year AAA municipal bonds has seen its yield rise to 3.26% in Q1 of this year.
“Just looking at the current yield environment, maybe we would argue it's a great day to buy munis, because we haven't seen yield like this in a really long time,” Yeh told InvestmentNews. “As we start to migrate away from those weak technicals and towards the summer months that tend to be very strong for munis, there's an opportunity for a rally and stronger performance.”
An outlook report dated May 5 from Municipal Market Analytics supports Yeh’s view, noting that, “after weeks of disruptive and harmful volatility, last week’s municipal market turned stable and strong” with AAA benchmark curves rallying 8 to 11 basis points. Goldman sees a broader allocation adjustment towards muni bonds, whose attractive tax-exempt status has become increasingly under threat from the Trump administration.
“Over the last month, there's been a dislocation across markets that has made municipals even more attractive, versus, say treasuries or corporates, which are taxable securities,” said Brooke Mayne, a fixed income portfolio manager at Goldman Sachs. “I think this dislocation has made munis even more attractive across the board, for both the highest tax paying clients and even clients in the lower tax bracket.”
Congress has been considering eliminating the federal tax-exempt status on interest from muni bonds, which some city government leaders fear would drive up the costs to build roads, bridges and other infrastructure. Amid this lawmaking uncertainty, Mayne says that registered investment advisors are increasingly consolidating fixed income investments for their clients.
“Across the RIA landscape, we've seen a lot of traction on the ability for clients to think about their fixed income as one, and not be siloing corporates [bonds], treasuries, munis,” Mayne said. “Thinking about it collectively as their sleep well, high quality fixed income in one one bucket, we’re definitely seeing a lot of RIAs that find that compelling.”
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