DECEMBER 2016
A Post-Election Discussion with the
Muni Team Managers
Municipal bond markets have seen significant volatility since the election. What has been
driving this volatility, and how has Thornburg Investment Management’s municipal bond
team responded? To find out, we sat down with Chris Ryon, cfa and Nick Venditti, cfa,
managers of Thornburg’s municipal bond portfolios.
A Conversation with Thornburg Municipal Portfolio Managers
Chris Ryon, cfa, and Nicholos Venditti, cfa
Christopher Ryon, cfa, joined Thornburg as associate portfolio manager in 2008 and
was named portfolio manager in 2009. Chris has over 30 years of experience in the
investment management field. Before joining Thornburg, he served as head of the long
municipal bond group for Vanguard Funds, where he oversaw the management of more
than $45 billion in 12 intermediate- and long-term municipal bond funds. In 2013, Chris
was selected as a member of the Municipal Securities Rulemaking Board’s (MSRB)
board of directors. Chris holds a BS from Villanova University, an MBA from Drexel
University, and is a CFA charterholder.
Nicholos Venditti, cfa, joined Thornburg in 2010 as a fixed income research analyst and
was promoted to associate portfolio manager in 2011 and portfolio manager in 2015. Nick earned an MS in finance from Syracuse
University, an MA in applied economics from the University of North Carolina–Greensboro, and a BA from Trinity University. Prior to
joining Thornburg, Nick spent three years working as assistant vice president for bond insurer FSA (now merged with Assured Guaranty Corp).
Q: What has been driving municipal bond
yields higher following the election?
Chris Ryon: Immediately following the
election, bond yields across the fixed
income landscape rose based on higher
inflation expectations and the idea that
the Trump administration will stimulate
economic growth through tax cuts,
deregulation, and infrastructure spending. More recently, yields have increased
based on redemptions from municipal
bond funds. For many months leading up
to the election, municipal bond funds had
been seeing strong inflows. Those inflows
reversed themselves following the initial
rise in yields post-election. As those
funds sell bonds to meet redemptions, it’s
putting further upward pressure on
yields.
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2 | A Post-Election Discussion
Q: How does the prospect of lower tax rates
impact municipal bond prices?
CR: Historically, we’ve seen little
correlation between tax rates and municipal bond prices. Recent research published by Citi’s municipal bond team
pointed out that not all municipal bond
holders are in the top 39.6% tax rate, and
in fact, they estimate that the average tax
rate of municipal bond holders is somewhere between 23% and 28%. Further,
the research showed that municipal bond
yields have been trending down for the
past 15 years, even as the top marginal
tax rates have fluctuated between 31%
and 39.6%. When President George W.
Bush cut taxes in 2001 and 2003, it had
no discernible impact on municipal rates.
There is talk about lowering corporate tax
rates, which could impact demand from
insurance companies and banks; however,
they own less than 25% of the muni
market, and even there the impact would
be confined to marginal buying.
Q: Given the rhetoric surrounding
infrastructure spending under a Trump
Administration, do you expect to see more
issuance, and what would this do to prices?
What are the prospects for public-private
partnerships?
CR: It’s way too early to tell, particularly
since we don’t know where infrastructure
spending falls on the new president’s
agenda. We’ve also seen some policies
spoken about on the campaign trail
walked back. Finally, these things take
time and planning. As President Obama
said in 2010, “There are no shovel-ready
projects.”
Nicholos Venditti: Public-private partnerships sound great in theory, but may be a
little harder to pull off in practice. Private
entities are going to want to see some
return on their investments. While those
returns may come from projects producing revenue, like airports or utility
systems, I am skeptical that any private
entity is going to start filling potholes.
Perhaps more apropos given recent news,
how likely do you think it is that a private
entity steps in to solve the water crisis in
Flint, Michigan?
Q: You’ve been talking all year about your
concerns around liquidity. How has
liquidity been in the market since the
election?
NV: So far, liquidity has been decent.
Municipal bond funds have seen redemptions which have caused those funds to
sell bonds. The bonds that they’ve been
selling have tended to be more liquid and
in shorter maturities. If we continue to
see redemptions for a protracted period of
time, it could get more interesting as
funds start selling their longer-term
holdings.
CR: I’d say that we’re in the middle-tolate stages of the first phase of a liquidity
event. As Nick said, funds have been
selling short, liquid paper. Keep in mind
though that periods of outflows can
persist for quite some time. So far, the
industry has seen one month of negative
cash flows—in November we had
industry-wide outflows of $9 billion. In
2013, following the taper tantrum, we
saw 10 months of outflows, including $16
billion in June of that year, $10 billion in
July, and $12 billion in August. So we’re
watching this closely.
We are engaging in activities that are making the
portfolios better. Because of previous portfolio
management decisions we have made, we are
able to make these changes effectively and efficiently.
Q: The portfolios have been conservatively
positioned for quite some time, with higher
credit qualities, shorter durations, and
elevated levels of reserves. What would
cause you to change your view?
NV: The recent increase in yields has
made things interesting, certainly relative
to the recent past. However, from a
longer perspective, absolute yields are still
very low and credit spreads remain very
tight. Our conservative position has
allowed us the flexibility to take advantage of this market opportunity without
materially changing the strategic positioning of the portfolios.
CR: We’ve put ourselves in position to be
proactive, as opposed to reactive. On days
when we see an uptick in prices, we may
sell bonds to book a tax loss and put the
proceeds into bonds at higher yields.
Markets like this show the value of active
management. Our process is based on our
best judgment of current opportunities.
Active management allows us to keep the
maximum number of options open.
Q: So are you putting reserves to work in
this market?
NV: Yes. Absolutely. But just because we
are seeing better opportunities doesn’t
mean we are altering the risk profiles of
the portfolios. For the past 18 months,
the portfolios have been managed in a
very conservative manner—shorter
durations, higher average credit quality,
and increased liquidity. Those decisions
have allowed us to take advantage of the
recent market dislocation.
CR: Again, active portfolio management.
We are engaging in activities that are
making the portfolios better. Because of
previous portfolio management decisions
we have made, we are able to make these
changes effectively and efficiently. The
A Conversation with Thornburg Municipal Portfolio Managers Chris Ryon,
laddered structure of the portfolios is
generating natural liquidity in the form of
maturities and coupons. We can put that
money to work, increasing the yields on
the portfolios without changing the
durations, the credit quality, or the strong
liquidity position. When we are being
better compensated to take risk, we can
tap into the large reserve positions and
push the portfolios into more bullish
positions.
NV: The important point is that the
market hasn’t forced our hand. While
many of our competitors are selling bonds
to meet redemptions, we have been
buying. We may sell bonds to take
advantage of capital losses, but we aren’t
forced to. That flexibility has been
incredibly valuable throughout November, and we anticipate it becoming more
and more valuable over time.
cfa ,
and Nicholos Venditti,
cfa
| 3
The ladders are helping us to be proactive. One of the
positive externalities of the laddered structure is the
natural liquidity. We constantly have a fresh stream of
maturing bonds and coupons.
Q: How are the ladders performing in this
environment?
CR: The ladders are helping us to be
proactive. One of the positive externalities of the laddered structure is the
natural liquidity. We constantly have a
fresh stream of maturing bonds and
coupons. In a rising rate environment we
can take that fresh cash and meet
redemptions should they come or reinvest
them back in the market at higher yields.
Fortunately, so far, our redemptions have
been very modest.
NV: That is an important point. When
rates go up, bond prices go down, and in
the short term that can be incredibly
painful for our shareholders. But our
active approach to laddering lets us
almost dollar cost average back in to the
market. Initially, our shareholders will see
a decline in the NAV, or portfolio value,
but over time, they should see the
dividend yield start to tick up to help
offset those losses. That is an incredibly
powerful mechanism from a total return
perspective.
Thornburg’s Tax-Exempt Bond Offerings
Mutual Funds
• Low Duration Municipal Fund
• New Mexico Intermediate Municipal Fund
• Limited Term Municipal Fund
• New York Intermediate Municipal Fund
• Intermediate Municipal Fund
• Strategic Municipal Income Fund
• California Limited Term Municipal Fund
Institutional Strategies
Separately Managed Accounts
• Intermediate Term Municipal
• Intermediate Term Municipal
• Limited Term Municipal
• Limited Term Municipal
• Low Duration Municipal
• Low Duration Municipal
• Strategic Municipal Income
• Customized SMAs
Important Information
The views expressed are those of Thornburg Investment Management. These views are subject to change at any time in response to changing circumstances in the markets and are not
intended to predict or guarantee the future performance of any individual security or the markets generally, nor are they intended to predict the future performance of any Thornburg
Investment Management account, strategy or fund.
The laddering strategy does not assure or guarantee better performance than a non-laddered portfolio and cannot eliminate the risk of investment losses.
Income earned from municipal bonds is exempt from regular federal and in some cases, state and local income tax. Income may be subject to the alternative minimum tax (AMT).
A bond credit rating assesses the financial ability of a debt issuer to make timely payments of principal and interest. Ratings of AAA (the highest), AA, A, and BBB are investment-grade
quality. Ratings of BB, B, CCC, CC, C and D (the lowest) are considered below investment grade, speculative grade, or junk bonds.
Investments carry risks, including possible loss of principal. Portfolios investing in bonds have the same interest rate, inflation, and credit risks that are associated with the underlying
bonds. The value of bonds will fluctuate relative to changes in interest rates, decreasing when interest rates rise. This effect is more pronounced for longer-term bonds. Unlike bonds, bond
funds have ongoing fees and expenses. Investments in lower rated and unrated bonds may be more sensitive to default, downgrades, and market volatility; these investments may also be
less liquid than higher rated bonds. Investments in derivatives are subject to the risks associated with the securities or other assets underlying the pool of securities, including illiquidity and
difficulty in valuation. Investments in the Funds are not FDIC insured, nor are they bank deposits or guaranteed by a bank or any other entity.
Duration – A bond’s sensitivity to interest rates. Bonds with longer durations experience greater price volatility than bonds with shorter durations.
Past performance does not guarantee future results.
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing
this and other information, contact your financial advisor or visit thornburg.com. Read them carefully before investing.
Thornburg mutual funds are distributed by Thornburg Securities Corporation.12/13/16
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