Boston - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by volatile investor sentiment, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. The following are excerpts from a recent conversation with Cindy Clemson and Craig Brandon, CFA, Co-Directors of Municipal Investments for Eaton Vance Management.
What we are seeing: Until recently, the municipal bond market has been quite bifurcated. Where we generally saw more of a V-shaped recovery in higher-quality AA and AAA issues, the recovery has been slower for lower-rated names. Between March 9 and the trough on March 23, the Bloomberg Barclays Municipal Bond Index traded off 10.9%. During that same time period, the Bloomberg Barclays High Yield Municipal Bond Index was down 17.7%.
Since that time, through June 9, the overall index has recovered by 9.6% and the high yield index has come back by 13.3%. So we are beginning to see a little bit of a rebound in high yield now — especially in June. For the month through June 9, AAA and AA bonds have been relatively flat, while the BBB section of the index is up 1.15%. In short, we view the higher quality space of the muni market as mostly fully recovered, while high-yield issues have slowly started to recover.
What we are doing: From a credit perspective, before we can say high yield could be fully back, we rely on our team of analysts to look at the actual data. We are waiting to see what actual operating results look like for the various sectors of the market — from municipalities to toll roads to hospitals. Our analysts are hard at work trying to understand what balance sheet damage has been done from the impaired operations over the past couple of months. So again, we are cautiously optimistic about high yield, but we need to see exactly what damage has been done.
What we are watching: Taxable retail investors have a big influence on the muni market, of course. When we look at fund flows according to Lipper, in 2019 municipal bond funds saw a record $93.6 billion in flows, with $19 billion into high yield. By contrast, muni funds lost $47.9 billion during the eight weeks between March 11 and May 13, with high yield accounting for $14.8 billion of those outflows.
Since then, through the first week of June, we have been watching a slight recovery in flows. Roughly $5 billion back has come back into the primary overall market, with about $1 billion into high yield. So those flows are what has really been driving the muni market.
Final word: One last thing to consider is the Municipal Liquidity Facility (MLF), created by the Federal Reserve out of the CARES Act back in March to provide a last resort mechanism of liquidity for municipalities that may need it. To date, only the state of Illinois has tapped it for $1.2 billion. But the MLF gives the municipal market a lot of comfort in knowing that if we do see another crisis, and municipalities need liquidity, this facility is available for 390 of the biggest issuers in this market.
So that, along with evidence of recovery in performance and flows, makes us cautiously optimistic about the muni market going forward. And we will continue to watch high yield to see what develops there.