Mark Marinella is a fixed income portfolio manager with Capital Group Private Client Services with 34 years of investment experience including seven at Capital Group. In this interview, he discusses the early-year volatility in municipal bonds and the strong rally that followed.
The pandemic was obviously a big cause of the turbulence, but the fixed income market, particularly in munis right now, is healthy because we have the support of the Federal Reserve and the federal government. Treasury yields declined sharply in February and March because of investors’ flight to safety and the Fed action. Muni yields went up at the very outset, in March in particular. The jump in unemployment stirred fear that municipalities wouldn’t be able to raise revenue. The first response was sell, sell, sell.
But that began changing as the Fed anchored short rates close to zero, with assurances that they’d stay low for as far as the eye could see. The central bank also created programs to support debt markets. That includes the Municipal Liquidity Facility to help agencies meet their obligations and the latest quantitative easing program, which purchases fixed income. That has reassured investors that the government is dedicated to supporting markets.
The Fed doesn’t see any fear of inflation rising any time soon, and it knows the economy is running at far below what it was pre-virus.
Once the Fed stepped in, people regained some comfort with munis. There were more than a dozen weeks of straight inflows. Later, stalemates in Congress caused concern over federal support. Spreads widened a little bit, and bids weren’t as good. But people are still buying and the markets are functioning as they would in a more typical environment. Those couple of weeks in March were outliers.
Around the same time, the market was rolling through various sectors and either punishing them or rewarding them. One of the first hard-hit sectors was airports. People were asking: “When is anybody ever going to get on an airplane again? Who’s going to walk into that little tube and be trapped with the virus?”
But I don’t think that’s the way to look at it. I don’t think we can be a worldwide economic leader without global metropolitan airports. So I’m willing to invest based on that — post-pandemic, they will survive and even thrive.
Our muni offerings have done well. And the story behind that is great because it’s not just about the pandemic.
When we came into this year, one of the things on my mind was that munis had enjoyed a good run in the last couple of years. They didn’t seem to be as attractively priced as they once were. We were overweight our benchmarks in municipal bonds of various flavors. In January, many of our fixed income professionals started to say, “OK, we’re going to take a little of that exposure off, and we’re going to go up in quality.” Generally, we sold our BBBs and single As and invested in AAs and AAAs.
And just as we did that, a global pandemic happens and puts a premium on safety. I take zero credit for getting ready for the pandemic. But our normal relative value rotations led us to be less risky.
Different kinds of markets have different kinds of risks, and high-quality fixed income serves as a nice diversifier to equity market corrections. The highest grade fixed income is high on the list of things that can shape people’s confidence, as it can help anchor investors in troubled times.
That doesn’t mean that any given high-quality bond can’t go down when stocks go down. That’s not what we’re saying. But through a cycle, you will find pretty consistently that high-quality fixed income rises in price when equity markets correct.
And, of course, it provides income, even if the income right now is pretty low. And in munis, it’s tax-exempt income. Finally, it offers capital preservation because the default rate on investment-grade fixed income is quite low.
On a personal level, I’m fortunate to say no one close to me has been affected. In fact, knock on wood, I just don’t have any stories to tell, which I’m so thrilled about.
If there’s been a challenge, it’s that I miss people at the office. I’m enormously social. I love our group. I love interacting with people. But there’s been no change to our day-to-day functioning. The technology has been a godsend as we’ve all worked from home. We’ve been able to conduct research, share ideas and collaborate with each other as we always have.