Amid the coronavirus outbreak, as investors head for the exit, there is a rare, temporary opportunity in the municipal bond market.
If this scenario sounds familiar, it should. It’s a phenomenon we discussed back in 2008, during the Great Recession meltdown, and merits repeating.
There are certainly differences between then and now, and still much we don’t know about the coronavirus fallout. But in addition to the wild market swings during both periods, there’s at least another important similarity: the opportunity to take advantage of logic-defying herd behavior in the municipal bond market.
Basking in rising market values
As muni investors know, the municipal bond market has been on a tear for the past few years. This year, especially, there’s been a historic stampede into munis (“Muni Market Returns Rise Amid ‘Gluttonous’ Demand”).
Investors have delighted in viewing their statements every month as the market value of their holdings has continued to rise.
Yields, on the other hand, have been scraping decades-long lows, frustrating those looking to invest.
Which is why today is so intriguing.
The crowds that raided the muni market are doing a U-turn. With little foresight, they’re selling munis along with everything else. As a result, prices are falling and yields are fattening.
Coronavirus fallout and the municipal bond market
As longtime clients and friends know, we advocate against trying to time the market. It simply doesn’t work over the long run.
We do, however, support taking advantage of unique opportunities when they arise.
As the smoke clears, quality, long-term tax-free bonds can be had for over 3.00%. That’s more than 100 basis points above similar bonds last week.
Credit quality hasn’t budged. The only difference is… the crowds have receded.
In 2008, the spectacle was similar (“A Tale of Two Investors”), and those who took advantage of those opportunities profited handsomely. While some of the particulars (and yields) are different today, the important point is the same: good quality tax-free bonds can be purchased at bargain-basement prices.
Today, similar to the Great Recession, there will be investors who will view their monthly statements and lament the dip in the market value of their tax-free bonds.
But successful buy-and-hold investors see it differently. They know the paper value of their bonds fluctuates. Sometimes they increase in value, other times – like now – they decline. In the end, when their bonds come due, their principal will be returned. Bond funds, on the other hand, have no stated maturity date.
Importantly, muni investors recognize the coronavirus fallout in the municipal bond market is a unique, though temporary, opportunity to find genuine value.
They will add to their pile of tax-free income and sleep peacefully. Their focus on what’s important will have allowed them to see – once again – what others missed.