There may be no good alternative for muni bonds today. According to Mark Schmidt and Michael Zezas of Morgan Stanley, whether the economy slows or accelerates, the muni bond market could suffer. Bloomberg’s Amanda Albright reports:
A slowing U.S. economy could be bad for the asset class — and so could a rebounding one. That’s made the bank less optimistic about state and local government debt, which has returned 7.6% in 2019, marking the best year since 2014, according to the Bloomberg Barclays index. The bank’s municipal-securities strategists, Michael Zezas and Mark Schmidt, said in a note to clients Tuesday that further upside may be limited regardless of which direction the economy
If the economy accelerates, that could upend bond markets that currently expect the Federal Reserve to cut interest rates again over the next two months. On the other hand, a recession would pose different risks: it could drive up the yields on many government bonds, relative to the market benchmark, if tax
revenue slows, credit ratings are cut and securities that financed speculative projects run into distress.
“Munis’ outperformance potential appears limited, with risks skewed to the downside,” according to the Morgan Stanley strategists.
“Right now, of course, muni credit looks fine,” they wrote.
“But that’s typically how it goes – the upgrade/downgrade ratio tends to peak right as we go into a recession, and then deteriorates until after the recession ends.”