We’ve been getting a lot of questions from investors and clients over the last year or so, which, not surprisingly so, given how in flux the municipal market has been. So, we thought we’d take this opportunity to address the three most prevalent questions that we get from investors and clients.
The first question we get is, “What do you think the Fed is going to do this year?” Well, our expectation is the Fed is going to cut three times this year for about 75 basis points. But I will tell you, it doesn’t matter whether they cut once, twice or three times because as long as yields are falling, your bonds are gaining in value, which is why we’re suggesting that investors add duration to their portfolios.
The next question we get fairly frequently is around the shape of the municipal curve, which is inverted. And not surprisingly, we get that question because the municipal curve has never been inverted for any meaningful amount of time until last year into this year.
So what should investors do with that information? Well, you look to barbell around that. What I mean by that is you buy a short bond, you buy a long bond, and in this case, let’s say you bought a one-year bond and a 16-year bond, fifty-fifty. You’ll pick up about 50 basis points in yield above an eight-year bond but have the same interest-rate risk. So, investors: to pick up a little bit of yield, avoid that inverted part of the curve, look to barbell a portfolio if you can.
The third question we get fairly frequently is about the health of municipal and state credit quality. And the reason we get that is because of headlines. But investors need to read through the headline. And what do I mean by that?
Well, states and municipalities are sitting on the most cash as a percent of their expenses than they have ever had. Today, credit spreads are wide, so investors want to take advantage of that if they can, with the understanding that states and municipalities can weather an economic downturn if it were to occur.