- Fixed Income Portfolio Manager
United States, Institutional
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
After a year in which municipal bonds posted respectable returns (Figure 1), many clients have been seeking forward-looking guidance on the market as a whole and (increasingly) on particular sectors of it. Here are my latest thoughts as of this writing on the outlook for the rest of 2022.
Figure 1
The 30,000-foot view
In my view, municipal market fundamentals have never been stronger, buoyed by conservative financial policies and federal fiscal stimulus. Taxable-equivalent yields are much higher than those for equal-rated and similar-duration corporate bonds, but with a much lower historical default experience and typically lower interest-rate sensitivity for municipals. In addition, I anticipate a supportive technical backdrop for the market over the balance of 2022, especially on the tax-exempt muni side — where the prospect of higher individual tax rates should drive strong retail demand, with net supply likely to stay low given the current calendar of maturities.
A sector-by-sector breakdown
Broadly speaking, given the continued strength of the economic recovery and the extent of direct federal support for a wide swath of municipal credits, underlying fundamentals appear to be robust across most segments of the market — the one exception (as discussed below) being the senior living space.
Hospitals: Fundamentals will likely remain resilient in 2022, albeit not back to pre-pandemic levels. Volume has largely recovered across the acute care space, driving healthy revenue growth, although inflationary pressures on labor and supply costs will continue to pose a challenge. Providers will need to find ways to cut or redistribute costs. We generally favor providers with size and scale, as well as proven smart growth strategies.
Higher education: Despite the return of on-campus instruction, undergraduate enrollment continued to decline last fall. However, much of the decline was concentrated in for-profit and two-year colleges, with private nonprofit enrollment having essentially flattened. Credit fundamentals generally remain solid amid market performance supporting endowments and federal aid bolstering state and public university budgets. We currently favor opportunities in certain major niche schools and those in strong demographic areas.
Airports: The COVID slowdown has been definite proof of concept for the resiliency of airport credits. Despite dramatic decreases in enplanements, very few airports have seen across-the-board credit downgrades from the rating agencies, while S&P has begun to reverse many of its previous downgrades. Meanwhile, enplanement levels nationally have reached about 80% of prior peaks and, in the case of some domestic-focused airports, are now above said peaks.
Toll roads: As of the third quarter of 2021, nationwide toll road traffic was back to around 90%+ of pre-COVID levels, with some states having surpassed those levels. This segment will likely receive a boost from higher inflation, as roughly half of US toll roads have an automatic inflation adjustment built into their toll-rate policy. Longer term, growth rates will bear watching amid new hybrid work schedules.
State and local: State and local credit quality is expected to remain stable over the next 12 months, supported by still-adequate income and sales tax performance, property value growth, and solid reserve and liquidity positions. However, as federal stimulus programs wind down and consumption begins to transition more toward services, we believe the recent trend of healthy revenue growth is likely to moderate.
Student loans: Many of the municipal bonds in the student loan space are private loans (usually taken as a supplement to federal student loans), either “in-school” loans or refinancing of existing ones. Many of these have performed well — and may continue to — as a result of federal loan forbearance in recent years, which has given large numbers of borrowers extra cash with which to pay down their private loans.
Senior living: COVID continues to be a big determinant of occupancy levels and financial results in this space, but the general attitude and modus operandi seem to have shifted from “catastrophic” to “manageable.” However, challenges persist amid seasonal COVID factors and lingering uncertainty around the pandemic. Overall, its continued impact remains very credit-dependent, driven by occupancy rates, supply costs, and other facility-specific factors. We favor credits with predictable operating cash flows, known capex plans, and ample liquidity.
Expert
Related insights
Showing
of
Insights Posts
Fed delivers rate cut, but hawkish 2025 guidance sends yields up
Continue reading
3
min
Article
2025-06-30
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Fed delivers rate cut, but hawkish 2025 guidance sends yields up
Fixed Income Analyst Caroline Casavant examines the outcome of the December 18 Federal Open Market Committee meeting and the implications for rates, inflation, and real growth.
3
min
Article
2025-06-30
Weekly Market Update
What do you need to know about the markets this week? Tune in to Paul Skinner's weekly market update for the lowdown on where the markets are and what investors should keep their eye on this week.
4
min
Video
2025-12-31
Going their separate ways: Capitalizing on bond divergence
Our fixed income experts discuss how to position portfolios for a world of uncertainty and divergence, exploring key themes and evolving bond opportunities for 2025.
7
min
Article
2025-12-31
Bond Market Outlook
Our fixed income experts assess how to capitalize on market volatility with a flexible and dynamic approach that leverages diverse high-yielding opportunities and manages risks carefully.
2025-12-31
Scaling opportunities in a new economic era
Explore our latest views on risks and opportunities across the global capital markets.
Article
2025-12-31
Credit market outlook: Expect greater opportunities in back half of 2023
Against a backdrop of elevated recession risks and banking-sector stress, Fixed Income Portfolio Manager Rob Burn identifies relative-value sector opportunities in the credit market.
Article
2024-06-30
Fixed income 2023: Will opportunity keep knocking in the second half?
Learn where Fixed Income Strategist Amar Reganti sees opportunities in the fixed income market today and dive deeper into the three key themes he thinks investors should consider going forward.
Article
2024-06-30
A quiet bull market in EM local debt?
Brian Garvey illustrates the recent strength of emerging markets local debt following an extended period of underperformance.
Quick Take
2024-06-30
Global high yield: Attractive entry points could soon emerge
Fixed Income Portfolio Manager Konstantin Leidman shares his outlook for high-yield fixed income for the rest of this year and beyond.
Article
2024-06-30
The “money illusion” economy: Misplaced faith in markets?
Fixed Income Portfolio Manager Brij Khurana shares a skeptical view of US Federal Reserve policy, his assessment of the current market backdrop, and his view of what the future could hold.
Article
2024-06-30
URL References
Related Insights