Municipal Experts Cast Predictions for 2016
December 24, 2015 1:05 PM
The impact of Decembers interest rate increase was just one of the topics, as municipal portfolio managers, strategists, analysts, and directors, weighed in with predictions for 2016:
Jim Colby, senior municipal strategist and portfolio manager at Van Eck Global: We expect higher issuance volume, spurred by refunding and an uptick in infrastructure financing. There will be uneven economic performance giving rise to less inflationary pressures than the Fed anticipates, and we believe the Fed will find fewer opportunities to raise rates than forecast.With the new age of monetary policy launched, muni investors are freed from the chains of uncertainty and can once again view municipals on a competitive and relative value basis.We anticipate a curve-flattening scenario, similar to that of 2003-2006, to encourage investors to look at longer dated securities. As rates remain low, high-yield will continue to perform well as an important source of income generation.We also anticipate that muni exchange traded funds will continue to find sponsorship amongst asset allocators and gain in market share.
Michael Pietronico, chief executive officer, Miller Tabak Asset Management: Triple-A bonds will outperform triple-B bonds as credit risk takes center stage in the bond market. The municipal yield curve will resume a steepening trend by the summer of 2016 as the economy enters recession. Hospital bonds will be the worst performing sector of the municipal market as the likelihood of a repeal of Obamacare becomes more of a possibility.
George Friedlander, senior municipal strategist, Citi: 2016 will be the year in which the potential effects of accelerating technological change will become a more visible factor for state and local governments, and within the municipal bond market.Affects include dampened inflation, limited tightening by the Fed, a continuing relatively flat yield curve, and more willingness for individuals to get back into the market and out along the yield curve. Over time, we expect more of a focus on potential credit implications as the effect of accelerating technological change hits various states and cities differently. However, this might not happen until after 2016."
John Mousseau, director of fixed income, Cumberland Advisors: My predictions for 2016 include a federal overseer for Puerto Rico, as well as the bellwether Puerto Rico bond trades back to 85 to 90 cents on the dollar.In addition, we see an agency with federal oversight that eventually has bonding power -- think of a municipal assistance corporation for Puerto Rico. Long municipal ratios go well under 100% as you get later in the year, a combination of higher Treasury rates and lower muni rates amid a backdrop of the Fed hiking short term rates, the Feds rate hikes actually help to engender some higher inflation as smaller banks get more in the game and the velocity of money picks up. Chicago/Illinois gets better during 2016. Chicago actually makes progress and Illinois starts the process to change their constitution to allow pension reform.Lastly, Hillary Clinton is elected president and introduces a new BABS program in 2017.
Jeffrey Lipton, managing director and head of fixed income research and strategy, Oppenheimer & Co.: We see 2016 muni performance slightly ahead of 2015 performance, but dont expect double-digit returns. Munis are expected to outperform Treasuries in 2016 on lower tax-exempt issuance, strong demand and a favorable economic and credit backdrop.We expect volume to be lower in 2016 relative to 2015, likely in the $360 billion to $385 billion range. Refunding activity is not expected to match what we have seen in 2015.Any uncertainty over the pace of a post-lift-off tightening sequence could elevate the level of refundings early in the year, but the overall refunding economics will likely be tempered in 2016. New money financing may rise above 2015 levels, but not appreciably as we move through the election cycle and issuers continue to pursue fiscal austerity. Unfunded pension liabilities and OPEBs will continue to crowd out other funding commitments, including debt service. These considerations are likely to overshadow the presence of still-compelling borrowing terms that will likely be available in 2016 as well as significant infrastructure needs. We point out the importance of net supply figures, which account for the amount of redemptions and maturities. Factoring in these data points, we are seeing negative net supply for 2015 and we expect similar patterns for 2016.In addition to favorable technicals, a stable credit environment, a largely retail dominated, buy and hold market and a minimal threat of tax-reform in 2016 should support the asset class next year We expect continued variability in relative value ratios over the near-term as Fed policy sentiment results in episodic bond market sell-offs. Election cycle rhetoric could assist muni relative value ratios.As rates rise, we could expect some marginal widening in credit spreads with volatility mostly linked to unfunded pension liabilities and uneven revenue performance for various credits and sectors.Tax revenue collection volatility will likely endure in 2016, both at the state and local level. States, however, will continue to possess greater budgetary and operational flexibility than locals. Although many credits have plateaued in terms of improving quality, overall credit quality is sound and contributes to a constructive backdrop heading into 2016.Puerto Rico will intensify in 2016, with hopefully a better handle on individual credit restructurings. Importantly, we continue to maintain that the Puerto Rico crisis will not have a systemic impact upon the broader muni market. Defaults and Chapter 9 filings may increase in 2016, but they will likely be contained. Illinois and New Jersey will retain headline status with the possibility of further downgrades. We do, however, expect both states to continue to meet timely debt service on their general obligation/appropriation debt.
Chris Mier, managing director of analytical services, Loop Capital Markets: Our prediction we have is that increasing risk aversion will siphon investment flows from equities, high yield corporates, and other risky assets, and some of those assets will find their way into municipals, increasing the demand for municipal bonds on the margin.
