Munis on a roll

Kyle: Ann, first of all, congratulations on your promotion to the head of the muni bond group. Having worked together with you for many years, I've seen firsthand the strength and leadership you bring to the muni franchise. Truly an asset. And as we continue to work together in the future, I look forward to the new chapter together. But let me shift to the business at hand. Tax season is right around the corner. Investors could be considering ways to limit their tax liabilities. I think muni bonds are a great option. How would you characterize the current state of the muni industry?

Ann: Well, first, congratulations to you on being named head of the municipal money market group. I cannot believe that it has been 30 years since you and I sat next to each other analyzing muni credit, and it has truly been great working alongside with you all of these years. And now, with both of our teams, we truly have the entire muni yield curve covered. But, municipal bonds are the best performing US fixed income asset class year to date. And in an environment where yields are range bound and volatility has declined to pre-COVID levels, income becomes the primary driver of total return. And in this environment, high income earners should consider municipal bonds given their high taxable equivalent yields that dominates taxable alternatives.

Just to put this in context, if you consider 2 indexes, the muni bond investment grade index compared to the US Agg, these are two indexes, both have AA credit quality, duration around six years, but you're looking for the Bloomberg Muni Bond Tax Exempt taxable equivalent yield is going to be close to 6% compared to the US Agg yield of more closer to 4. So, you pick up significant yield on a tax equivalent basis, choosing the municipal option for higher income earners. Also, municipals are a high-quality asset class, and fundamentals remain strong. And even when, as it probably will, volatility increases, the high income of municipal bonds provides significant downside protection if there were to be a rate shock. I'd like to talk to you more about your outlook on liquidity within the tax-exempt sector as we move through the year.

Kyle: Well, we remain positive and we have for some time now. True, the Federal Reserve's been in a rate cutting pattern since late in 2024, but it's from a very high level, north of 5%. And most people feel that this is nearing an end with outlooks, including ours, for a 25 basis-point cut around mid-year and with one more 25 basis-point cut around year end or by year-end. And that could be the final cut. So that would leave the federal funds rate at around 3%. And if you look back over the last 15, 20 years, that's a very attractive level. And during this period of higher rates that began in 2022, we've seen very strong demand. For specifically, muni money market fund assets have increased by over 70% during that time. And in each of those four years, the growth has been over 10%. At the same time, you know, the supply of municipal money market securities has increased at a much more moderate rate and has seasonal patterns where they have peaks and valleys. So, when you put that together, that helps largely explain some of the weekly fluctuations in yield you might experience in the muni money market space.