MacKay Shields LLC, a fixed income investment firm with about $92.45 billion under management, said its bullish forecasts for municipal bonds this year are on target so far.
The firm predicted rising demand, a steep yield curve, volume growth, the return of monoline insurance, and outperformance in the tobacco sector — all trends that are on track through the first half of 2015, according to a mid-year update released last week.
"The municipal marketplace continues to offer opportunities for investors in 2015 and a relative-value investment approach with a focus on total return is an optimum approach going forward," John Loffredo and Robert DiMella, co-heads of MacKay Municipal Managers wrote.
This is "The Year of Transition to Active Management" according to the report.
"Many areas of the municipal bond market have received high profile attention and, historically, active management in this market has served portfolios well, helping investors to find the right bonds at the right prices at the right time," Loffredo and DiMella wrote.
MacKay Municipal Managers, which managed $13 billion as of June 30, is the municipal bond team of MacKay Shields LLC and a sub-advisor to the MainStay Investments' municipal suite of funds.
The bond team said its prediction for increased demand has proven to be on target, as institutions — namely insurance companies — increased their exposure to municipals in the first half. They cited data that showed $8.6 billion of net mutual fund inflows through July 1, based on research provided by JPMorgan using Lipper Inc. U.S. fund flows.
Demand was especially steady in the tobacco sector where investors were able to maintain their yields as existing higher coupons were called or matured, the MacKay managers said.
They referred to the performance of the tobacco segment of the Barclays High-Yield Municipal Bond Index, which returned 1.63% through June, compared with the Barclays High Yield Municipal Bond Index, which returned negative 1.92% and the Barclays Municipal Bond Index, which returned just 0.11% during the same period.
As exposure to municipals increased, the growth of new bond issuance swelled, and the market saw the return of monoline insurance on new issuance.
Municipalities sold $220 billion of new issuance through June, which exceeds the firm's expectations, and is set to exceed $375 billion by the end of the year, the managers said.
Of the new issuance, 66% represents refinancing volume.
At the same time, monoline insurance on new issues had reached 7.5% as of June 30, which is headed in the right direction toward the firm's prediction of greater than 10% in 2015 for the first time in six years.
Meanwhile, the firm saw the yield curve flatten and high-grade bonds with short to intermediate maturities underperform, as forecasted. However, Loffredo and DiMella said they are avoiding this slope of the curve as a precaution against potential flattening if a rise in short-term rates is priced into the market.
MacKay Municipal Managers sub-advises the MainStay Tax Free Bond Fund (MTBAX, MTBIX), MainStay Tax Advantaged Short Term Bond Fund (MSTAX, MSTIX), MainStay High Yield Municipal Bond Fund (MMHAX, MMHIX), MainStay California Tax Free Opportunities Fund (MSCAX, MCOIX) and the MainStay New York Tax Free Opportunities Fund (MNOAX, MNOIX).
MacKay Shields LLC, which manages fixed income strategies for high net worth individuals, institutional clients, and mutual funds, had $92.45 billion in assets under management as of June 30. It is the sub-advisor for MainStay Investments, the mutual fund and exchange-traded fund distribution arm of New York Life Insurance Co., with over $92.35 billion in assets under management as of June 30, according to the firm.
