High Yield Municipal Bond Fund Commentary - Lord Abbett
[Pages:4]Fund Commentary 4Q21
HIGH INCOME MUNICIPAL BOND FUND
MARKET REVIEW
The municipal market, as represented by the Bloomberg Municipal Bond Index, returned 0.72% during the fourth quarter of 2021.
In terms of sectors, Revenue bonds outperformed General Obligation bonds over the period, with the Education, Special Tax and Transportation sectors leading.
In terms of quality, higher quality tiers outperformed lower quality tiers in October amid volatility at the start of the quarter. In November and December, this trend reversed with lower quality bonds outperforming, resulting in the `BBB' tier leading among investment grade bonds. For the period overall, within the investment grade range, the `AAA' credit tier outperformed, closely followed by the `BBB' credit tier. The high yield segment of the municipal bond market, as represented by the Bloomberg High Yield Municipal Bond Index, outperformed higher quality bonds, returning 1.16% during the quarter.
In terms of maturity, during the fourth quarter, the yield curve flattened, as short-term yields rose modestly and yields on the longer end of the curve fell. Thus, longer-term bonds outperformed shorter-term bonds.
On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act. The bill provides over $1 trillion in total spending with $550 billion in new spending and will include funding for roads and bridges, ports, airports, electrical infrastructure, water systems, rail networks and broadband improvements, among other initiatives. Absent from the legislation was the reinstatement of advanced refunding and direct-pay bonds.
Municipal funds took in $11.9bn in net flows during the fourth quarter, according to Morningstar, increasing YTD inflows to $93.6bn, the highest inflow for a calendar year on record.
PORTFOLIO REVIEW
The Fund returned 1.36%, reflecting performance at the net asset value (NAV) of class A Shares with all distributions reinvested, for the quarter ended December 31, 2021. The Fund's secondary benchmark, an 85%/15% blend of the Bloomberg High Yield Municipal Bond Index and the Bloomberg Municipal Bond Index, returned 1.09% during the same period.
The primary driver of the Fund's outperformance was yield curve positioning. Over the quarter, the yield curve flattened, as yields on short-term key rates rose modestly and yields fell progressively farther in the intermediate and longer-term key rates. Therefore, the Fund's duration overweight to the 20-year and 30-year key rates contributed to relative performance.
In terms of sectors, the impact to performance was slightly positive. Security selection within the Transportation sector contributed to performance, as selection of longer duration New York Airport and Mass Transit credits led to performance tailwinds with the flattening of the yield curve. Similarly, an overweight to, as well as security selection within, the GO State sector benefited performance. In particular, selection of GO bonds in Illinois drove performance, as these credits had been trending higher throughout the year and were given a positive outlook in November.
While performance benefitted overall from sector positioning, an underweight to, as well as security selection within, the Healthcare and Special Tax sectors detracted from performance and offset some of the aforementioned contribution. Within the Healthcare sector, the Investment Team decreased its allocation to the Senior Living segment not long after the onset of the pandemic and the Fund has remained underweight since then. This underweight
1
Fund Commentary 4Q21
detracted during the fourth quarter, given the rally in high yield, as lower quality Healthcare bonds, particularly in Senior Living, performed well. The Fund's quality allocation resulted in a modest negative impact to performance. Given the outperformance of noninvestment grade bonds over the period, predominantly in the latter half of the quarter, the Fund's overweight allocation to the lower quality, investment grade bonds in the `BBB' and `A' quality tiers led to performance headwinds. Of note, while mainly invested in non-investment grade bonds, the Fund maintains an overweight allocation to investment grade credits for diversification and liquidity purposes.
STRATEGY POSITIONING & OUTLOOK
Although primarily invested in non-investment-grade bonds, the Fund is overweight `A' and `BBB' rated bonds, relative to its secondary benchmark, an 85%/15% blend of the Bloomberg U.S. High Yield Municipal Bond Index and the Bloomberg Municipal Bond Index. The Fund has a higher quality positioning relative to the benchmark to provide diversification and enhance liquidity.
From a sector perspective, the Fund is currently overweight the Industrial Development and Transportation sectors relative to the secondary benchmark.
We expect the credit backdrop of the municipal market to remain strong. The economic recovery since the onset of the pandemic has progressed better than expected, as the rollout of the Coronavirus vaccines has accelerated the reopening, tax receipts have grown significantly relative to the prior year and pre-pandemic levels, and there has been unprecedented federal stimulus to support state and local governments. Additionally, upgrades have outpaced downgrades throughout the year and many of the sectors downgraded during the pandemic have been changed to stable or positive outlooks. Municipal issuers' balance sheets may continue to strengthen in 2022, as robust federal spending continues to trickle down to municipalities and funds from the Infrastructure Bill will begin to be distributed to state and local governments. We believe many of these tailwinds will continue into the first quarter of 2022 and support the fundamental backdrop of the municipal market. Given this strong credit backdrop, we are positive on credit risk going forward.
By the end of the fourth quarter of 2021, the municipal bond market had experienced a record year in terms of fund flows. We expect that strong demand for municipal bonds will continue, partly due to the asset class' solid relative performance over the last two years along with flat to potentially higher tax rates going forward. While overall municipal supply may be slightly higher in 2022, partly due to an increasing share of total issuance stemming from taxable municipals, we expect tax exempt supply to be in line relative to 2021 levels. As state and local governments' revenues may be higher in the coming year, this could increase municipal issuers' capacity for issuing debt.
It is uncertain at this time whether the Build Back Better plan will be signed into law given the current gridlock in the Senate. The bill would include funding for childcare, healthcare, climate change, affordable housing and education, among other measures. If the bill were to be signed into law, it is unlikely that it would include advanced refunding or federally subsidized bonds. However, should the legislation pass, we believe it would likely further support the already strong fundamental backdrop of the municipal market.
2
Fund Commentary 4Q21
Credit Quality Distribution
AAA
0% 3%
AA
5% 9%
A
10% 3%
BBB
22% 9%
BB
16% 17%
B
4% 3%
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related searches
- high yield municipal bonds
- best high yield municipal bond funds
- vanguard high yield municipal bond fund
- high yield municipal bond funds
- municipal bond fund yields
- municipal bond fund returns
- high yield municipal bond fund
- high yield municipal bond etfs
- high yield municipal bond etf
- vanguard municipal bond fund comparison
- blackrock municipal bond fund inc
- municipal bond fund taxation