Full Video Transcript Below:
CAROLINE WOODS: Joining me now is Bill Roach, portfolio manager and senior trader at Macquarie Asset management. Bill, Thanks so much for being here.
BILL ROACH: Thanks for having me.
CAROLINE WOODS: So Bill, we’re talking fixed income with stocks near record highs. The S&P 500 is up what 10% year to date. Why should investors be paying attention to bonds specifically municipal bonds right now?
BILL ROACH: Yeah I think municipal bonds offer a really unique opportunity in the market right now. I think specifically for munis. The longer end of the curve looks very attractive. A lot of people probably have taken note that, the Fed is likely to hike. Treasury rates have fallen on the front end. Munis have experienced the same thing. The difference in munis has been that due to some technical factors, our long end is actually up about 50 basis points in yield. Year to date. So and relative value to treasuries, which produces a lot of opportunity for high level tax exempt income. And when you do take that tax exemption from munis into account you’re looking at yields that are in the high single digits, which is really know, compelling case for total return.
CAROLINE WOODS: Yeah because that’s the thing with Muni bonds, I feel like they’re often pitched as tax free income. So are they as really as good of a deal as they seem right now. I mean, high single digit yields is not necessarily what the S&P is returning, but it’s higher than a lot of bonds and it’s higher than a savings account.
BILL ROACH: Yeah I think there really is compelling value there. And I think, you know, it’s in the context of what’s going on the fundamental side, which has been broadly good performance from state and local governments. And issuers in our marketplace with, you know, fundamentals in good shape. And really the dislocation has been driven by technical factors. We’re experiencing higher than usual supply on pace to be about $400 billion as of the end of this week, which is on pace to be a record year. So far. And really, the demand has been focused into particular areas of the marketplace. We’re seeing about $25 billion in flows so far this year. 7 billion coming into mutual funds and the bulk of which 75% or so has come into ETFs. And that ETF flow has really been concentrated in high grade and has been concentrated about half of it, you know, towards the shorter dated maturities, which has led that part of the market that kind of outperformed and caused sort of underperformance in the longer end, which, again, I think when you look at the tax exempt yields and the fact that it’s a kind of a technical disruption and not a fundamental disruption, the opportunity really is a pretty good one right now.
CAROLINE WOODS: You mentioned the Fed. How much does the Fed’s September meeting matter for munis? The expectation is that the Fed will cut by at least 25 basis points. There are calls for what? Two to three cuts this year. Does that make munis more attractive, attractive or less attractive.
BILL ROACH: Yeah, I think there’s kind of two sides to that answer. One is, you know, if you look at shorter dated treasuries, money markets, you mentioned savings accounts. You know, as the Fed does cut there’s reinvestment risk there, right. The shorter dated investments are going to go down in yield, and you’re going to be able to lock in those rates. And I think folks are experiencing that this year who might have bought, you know, one or two year CDs over the last few years or money markets, and they’ve enjoyed that income in the front end. And that’s been a great opportunity and a great place to be. I mentioned moving up the curve. You know, munis are a longer dated asset class. You look at the typical kind of Muni financing deal, and 75, 80% of those bonds will come on the long end 15 or 20 years out. And that’s, like I said, from a technical perspective, cheapened up quite a bit and offering really attractive yields. So I think for the Muni market, certainly we welcome some Fed cuts. But in the bigger picture for a lot of the marketplace, which is longer dated, it has more to do with what the longer end of the Treasury curve is doing. And as we’ve seen, getting a little bit of, you know, assurance that the Fed will cut is helpful. But, you know, moderating growth will help the long end and should help munis as well. And I think, you know, there’s a lot of technical factors within the Muni market, like continued demand and a little bit less supply that could push Muni long end yields down as well.
CAROLINE WOODS: So where do you see the best opportunities for the average investor when it comes to municipal bonds.
BILL ROACH: Yeah, our team still thinks the long end is really attractive. So call that 20 years or longer. In terms of our curve, again, we’re about 50 basis points higher in yield or cheaper than we were to start the year. And to frame that against treasuries they’re roughly flat. So I think the underperformance there has created a great opportunity. And what we’ve seen is I mentioned, the ETF flows being the predominant part of the flows that we’ve seen this year. And like I said, about half of those flows have come in 10 years or shorter. And it’s been primarily investment grade. What we tend to see is that and not to conflate ETFs with passive. Totally but most of the ETFs are passive products. And I think what you see when you start to see active managers get more money is a little bit more embracement of the longer end of the curve and credit. So that that’s where we see. I don’t know if that manifests itself in mutual fund flows coming back, or we have seen quite a number of ETF active ETF launches in our marketplace, as well as some pretty notable conversions of size. So whether that comes back into mutual fund flows supporting the long end or whether, you know, just active managers in general see more flow. I think that’s kind of where we’ll see the catalyst for that driver and opportunity. I think that’s something we’ve leaned into at Macquarie and launching a couple ETF products that we can manage actively. And I think, again, the longer end of the curve is where we see that opportunity.
CAROLINE WOODS: OK so on that note, for investors who don’t want to pick individual bonds, how can Muni ETFs like some of yours stacks and stacks? I’m not sure if I’m saying those right, but stacks and stacks fit into a portfolio.
BILL ROACH: Yeah, I think we’ve had a lot of conversations with folks about pairing that with, you know, an SMA or an individual bond portfolio. I think, you know, there’s a lot of advisors and individual investors out there that are comfortable picking their own individual high grades down the curve building that as kind of the base of the portfolio. But when you start looking at longer dated maturities and less liquid parts of the market, having active management is really important. And having that active management in a liquid vehicle like an ETF is really important. I think as we launch these products, one thing that was really eye opening to me was that know, we can largely manage in the ETF wrapper the same way we do in a municipal bond mutual fund. We actually just get a little bit better clarity of inflows and outflows as we have to approve all the redemptions and creates. So you get a little bit more real time feel on the flow, which is always great. As an active manager, to have a little bit more insight and a little bit more information in real time.
CAROLINE WOODS: OK, so if I’m a retail investor thinking about investing in munis for the first time. When it comes to risk, what should I be most cautious about. And what’s the most important thing for me to know. Heading in.
BILL ROACH: Yeah, I think certainly having a good expectation of what risks are involved is obviously good for all investments. And I think there’s a lot of different pockets of the municipal bond market, and liquidity can be a big piece of that. I think that’s a great reason to have an active manager. I do think, you know, munis over time have gotten a little bit more volatile. We’ve seen that this year. And I think taking a look at rate risks and certainly credit risks, depending on how low in credit you want to go, makes a lot of sense. And I think certainly looking at the longer end of the curve and the liquidity there, I think having a manager to help manage that liquidity risk and interest rate risk makes a lot of sense.
CAROLINE WOODS: OK we’ll leave it there. Bill Roach, portfolio manager senior trader at Macquarie, Macquarie Asset management Thank you so much.
BILL ROACH: Great Thanks for having me.
