2022 was a difficult year for municipal bonds, yet credit fundamentals remained strong. Could municipals be poised for a rebound? Investor interest may encourage a rebound amid higher-for-longer interest rates and continued recession fears.
The Financials sector fell 2.1% last week as Q4 earnings results were a mixed bag for some of the larger names. Oil continued to trend upward based on renewed expectations for higher demand and closed the week 1.8% higher.
New Zealand Prime Minister Jacinda Ardern unexpectedly announced her resignation last week, passing the premiership to Chris Hipkins, leader of the Labour Party. In the Czech Republic’s presidential election, the final round of voting will be held this weekend. Former army general Petr Pavel currently leads the former Prime Minister Andrej Babiš.
The 2023 World Economic Forum annual meeting, held in Davos, Switzerland, focused on the theme of “cooperation in a fragmented world.” Inflation was a consistent thread, as worries mount that China’s re-opening will push global prices higher. The ongoing war in Ukraine and the climate crisis were also debated.
UK retail sales unexpectedly fell by 1% in December,1 as a cost-of-living crisis continues to squeeze consumers’ wallets.
Last week, Microsoft announced 10,000 employees will be let go. Alphabet has said it will reduce its workforce by 12,000. Days later, Spotify joined rank and cited a gloomy economic outlook as the driver behind cutting 6% of its global workforce.
Earnings season continues with reports due from big names like General Electric, Tesla, Microsoft, Boeing, IBM, Johnson & Johnson, and Visa. As of January 20, the blended earnings decline of the S&P 500® for the fourth quarter was -4.6%.2 If this materializes, it will mark the first year-over-year earnings decrease since Q3 2020.
2022 was a difficult year for municipal bonds, as rampant inflation pushed real yields into negative territory. Yet credit fundamentals remained strong. This may encourage a rebound as quality comes into focus amid growing recessionary fears.3 And if investors looking to adjust to higher-for-longer interest rates choose to pursue the income boost that tax-free municipals provide, that could reverse the sizable outflows seen in 2022.4
Yields Retreated From Q4 Highs but Remained in the Top Quartile Historically
Coupled with the potential opportunity in municipal bonds, a focus on environmental, social, and governance (ESG) investing has permeated fixed income markets. More and more, investors are seeking to allocate to issuers aligned with a wide range of sustainability goals and practices. Expectations for ESG municipal issuance in 2023 range from $50B to $60B, compared to $45B in total issuance last year, indicating longer-term commitments to sustainable finance.5 Increased focus on this segment may lead to improved outcomes for investors, including greater transparency and less unchecked greenwashing.
The ESG municipal bond market can be opaque, fragmented, thinly traded, and complicated by asymmetrical ESG data availability. Investors looking for reliable income while aligning to sustainability goals may consider the SPDR® Nuveen Municipal Bond ESG ETF (MBNE), which utilizes a value-oriented strategy to identify higher yielding and undervalued municipal bonds with above-average return potential that meet certain sustainability characteristics.
MBNE uses an active management style to help identify inefficiencies while allocating assets toward the most ESG-oriented areas of the market. Despite a challenging environment, MBNE ranked in the 12th percentile among its active peers, both ESG and non-ESG, in December 2022.6 MBNE also ranks near the lowest quintile based on gross expense ratio relative to its peers in the US Fund Municipal National Intermediate category.7
MBNE Standard Performance as of December 31, 2022
1 UK Office for National Statistics, as of January 20, 2023.
2 FactSet, as of January 20, 2023.
3 Goldman Sachs Asset Management, Municipal Fixed Income 2023 Outlook, as of January 13, 2023. First time municipal bond defaults decreased 25% year-over-year.
4 Morningstar, as of December 31, 2022. US municipal bond ETFs and mutual funds saw $148 billion in outflows in 2022.
5 Goldman Sachs Asset Management, Municipal Fixed Income 2023 Outlook, as of January 13, 2023.
6 Morningstar, for the period from December 1, 2022 – December 31, 2022. Peer group = actively managed ETFs and mutual funds (oldest share class) in the US Fund Muni National Intermediate Morningstar Category.
7 Morningstar, as of January 20, 2023. MBNE ranks in the 81st percentile with a gross expense ratio of 0.43%. Active and passive open-end and exchange traded funds. Total universe is 327 funds.
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