PRINCETON, N.J., Jan. 26, 2017 /PRNewswire/ — MacKay Municipal Managers™, the municipal bond team of fixed income investment management firm MacKay Shields LLC, today delivered its top five municipal market insights for 2017. Key highlights include:
- Innovative Financing Accelerates: We believe Public-Private Partnerships (P3) projects, a popular infrastructure financing structure outside of the U.S., will gain increasing momentum. The faster development pace of P3 projects combined with tax credit incentives will align well with the new administration’s infrastructure development agenda. While P3 financing may displace some traditional tax-exempt issuance, we believe that the acceptance of P3 projects will be a net positive for additional two-way flow in the municipal market. P3 projects should introduce a multitude of new entrants, including private equity, developers, and non-traditional buyers to the municipal market. We expect that these entities will be enticed by municipal financing attributes, including attractive yields (for both borrower and lender), exposure to long duration, low correlation, cash flow stability, and low default rates.
- Liquidity Improves in the Municipal Market: The team expects federal regulations and oversight of U.S. banking institutions will ease. As a result, we believe these entities will increase the amount of capital committed to trading activities, including the municipal bond market. However, we anticipate that a greater awareness of liquidity and capital costs will motivate those institutions to show greater preference for bonds rated by at least one rating agency. Therefore, we believe that the liquidity of non-rated municipal bonds will continue to decline.
- High Tax States Outperform: We believe states with high income tax rates will outperform states with marginal to zero income tax. As federal tax rates are reduced, we expect municipal investors to become more keenly aware of the benefit of double exemption. We believe that demand for bonds in high income tax states will be even greater for those fiscally responsible state and local issuers that have maintained their credit strength. Outperformance of states benefiting from population growth momentum and underlying economic stability should protect investors against possible volatility from both legislative and market uncertainty.
- Municipals Outperform Treasuries and Lower-Rated Credit Outperforms Investment Grade: The team believes that municipal to treasury yield ratios will decline during 2017, as tax policy uncertainty subsides. The relative value of municipal bonds, when compared to the taxable market, will move back to more normal historical levels. We expect that this outperformance will provide municipal bond investors with an offset against any negative impact of federal income tax rate reductions. Additionally, spread widening in the fourth quarter of 2016 in the BBB and lower-rated categories offers investors tremendous yield and potential total return opportunities in an uncertain market, where rates will likely be more volatile. Historically, lower-rated, revenue-backed bonds have outperformed general obligation and higher quality bonds in rising rate environments, as underlying fundamentals improve, spreads tighten, and ratings are upgraded.
- Alpha Generation from Active Trading and Timely Execution: We believe the uncertainties of new legislation at the federal level will cause swings in perceived value across many sectors, especially healthcare and education. As such, we believe that security selection and buy/sell execution will be key to outperforming. In these types of markets, a nimble active management style should be better positioned to generate strong relative performance. Investors employing a buy and hold strategy or investments in funds that have become too large to maneuver effectively will not be able to adequately adjust to the market changes and may underperform in our view.
The MacKay Municipal Managers™ team is led by John Loffredo and Bob DiMella, co-heads and executive managing directors. For over 20 years, the pair has worked together on portfolio strategy and municipal credit. In those two decades, the team has grown to include portfolio managers Scott Sprauer, David Dowden, Michael Petty and Frances Lewis.
“Uncertainty is abound in 2017. The new administration will usher in the possibility of new federal legislation that, if implemented, could impact the municipal market. Hesitation regarding these changes and the resulting impact on state and local governments could delay the budget processes, capital projects, and debt issuance of many municipalities. However, state and local governments with strong budget controls, long-term capital planning processes, and accumulated reserves will remain strong during this time, and we believe that value will rise to the top in this uncertain market,” explained John Loffredo and Robert DiMella, co-heads of the MacKay Municipal Managers Team™.
To view the full year outlook, please visit: https://mainstayinvestmentsblog.com/2017/01/top-five-municipal-market-insights-for-2017/
About MacKay Shields LLC and MacKay Municipal Managers™ Team
MacKay Shields is a fixed-income focused investment management firm with $94.5 billion in assets under management as of December 31, 2016. MacKay Shields manages fixed income strategies for high-net worth individuals, institutional clients, mutual funds and other commingled vehicles. Its investment strategies include unconstrained bond, global high yield, high yield, high yield active core, municipal high yield, short duration high yield, low volatility high yield, municipal short term, core investment grade, municipal investment grade, core plus, core plus opportunities, convertibles, emerging markets credit, and bank loans. MacKay Municipal Managers™ is the investment team within MacKay Shields focused on municipal bond solutions and offers a number of specialized offerings designed to meet the unique needs of investors. The team currently manages approximately $20 billion in municipal bond mandates.
MacKay Shields LLC and MacKay Shields UK LLP (collectively, “MacKay Shields”) are indirect wholly-owned subsidiaries of New York Life Insurance Company. MacKay Shields LLC is a registered investment adviser and is regulated in the United States by the U.S. Securities & Exchange Commission. MacKay Shields UK LLP is authorized and regulated in the United Kingdom by the U.K. Financial Conduct Authority. For more information please visit MacKay’s website at www.mackayshields.com.
For additional information, please contact:
Allison Scott
New York Life Insurance Company
(212) 576-4517
[email protected]
Kevin Maher
New York Life Insurance Company
(212) 576-6955
[email protected]
This material contains the opinions of the MacKay Municipal Managers™ team of MacKay Shields LLC, but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only, and is not intended to constitute the giving of advice or the making of a recommendation. The investments or strategies presented are not appropriate for every investor and do not take into account the investment objectives or financial needs of particular investors. An investor should review with its financial advisors the terms and conditions and risks involved with specific products or services and consider this information in the context of its personal risk tolerance and investment goals. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Any forward looking statements speak only as of the date they are made, and MacKay Shields LLC assumes no duty and does not undertake to update forward looking statements. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Historical evidence does not guarantee future results. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.