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Outflows Can Create Potential Opportunities in Municipal Marketplace

Higher yields, wider credit spreads, and other common market reference metrics suggest relative valuations for muni bonds have become attractive.

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In the long-term cycle of municipal bond fund flows, extended periods of withdrawals can often help improve valuations across the marketplace, creating more appealing entry points to invest. Munis have experienced a long spell of outflows to start 2022, and many frequently cited reference metrics suggest valuations are now unusually attractive, not only compared with levels seen a few months ago but also on a longer-term basis.

While the turmoil that has played out across financial markets this year hasn’t spared municipal bonds, we believe it has created interesting opportunities. The cumulative effect has been a substantial move higher in tax-exempt yields, making the tax benefit of investing in munis much more compelling. For context, five-year A rated muni yields recently rose above 2.7%, according to Thomson Reuters, within the top percentile of yield levels seen over the past decade. It’s also the highest level since late 2018, when the Federal Reserve was already deep into a rate-hiking cycle and the 10-year U.S. Treasury yield was near 3.25%.

Relative valuations for investment grade munis, which appeared rich to begin this year, have cheapened and are now the most attractive we have seen since late 2020. As bond yields have moved higher, muni-to-U.S. Treasury yield ratios have also risen. Investment grade municipal bond spreads measuring the after-tax pickup versus comparable corporate bonds have widened as well (see Figure 1).

Lower down the credit spectrum, high yield munis also offer improved yields relative to high yield corporate bonds after accounting for taxes.

Shifting market structure

Muni outflow cycles have created an expanded set of opportunities for active fund managers in recent years, in part due to changes in market structure.

Over the past decade, the stockpile of muni bonds held by banks to help intermediate risk is down about 70%, according to Federal Reserve data. Banks and insurance companies are also less likely to become buyers during times of market stress, after corporate tax rates declined in 2018 to 21% from 35%, making tax-exempt munis less attractive for institutional investors.

Meanwhile, the potential needs for daily liquidity have grown significantly, with daily liquid muni vehicle assets under management (AUM) more than doubling since 2012 to over $1 trillion today, according to the Federal Reserve. As a consequence, volatility has become more pronounced during market outflow cycles.

Amid this year’s market volatility, muni bonds have seen increased differentiation and dispersion on the individual security level. In the secondary market, where existing bonds are traded, outflows have resulted in elevated bids wanted, meaning many bonds trying to be sold all at once. Securities in less-liquid sectors, or with features that make them less liquid, trade at wider bid/ask spreads as a result, creating improved investment opportunities.

In the primary market, where new bonds are issued, fewer bidders have been willing or able to participate due to outflows. Thus, buyers with dry powder have increased leverage to influence deal terms and capture more attractive levels of yield. In some cases, the lack of liquidity in the market has been so acute that deals have been withdrawn by issuers.

Fundamental and technical strength

The current outflow cycle is now almost as large as the one seen in 2020, at the advent of the pandemic, and has contributed to an outsized 175-basis-point (bp) rise in yields. Previous outflow cycles (see Figure 2) have often signaled buying opportunities, preceding periods of spread tightening.

Outflows Can Create Potential Opportunities in Municipal Marketplace

Even as fund flows and returns have been challenged this year, municipal credit fundamentals continue to improve. Issuers are benefiting from increased post-pandemic economic activity, unspent federal stimulus funds, and strong tax collections bolstered by residential real estate valuations, helping municipal credit rating upgrades outpace downgrades. As an example of this strength, Moody’s in April upgraded its bond rating for Illinois – the lowest-rated U.S. state – for the second time in the past year, the state’s first upgrades in two decades.

Technical factors should also help support the tax-exempt muni market, with expectations for net negative bond supply in 2022, meaning new issuance will lag behind the pace of maturing debt.

With the Fed poised to raise interest rates several more times in 2022, it’s notable that munis have historically outperformed Treasuries and corporate bonds during the past two Fed rate-hiking cycles. Tax-exempt munis have also shown resilience relative to other fixed income assets when the 10-year Treasury yield has risen significantly (for more on muni performance during periods of rising rates, see “Munis in Focus: 2022 Municipal Market Update.”)

Municipal credit quality tends not to be materially affected by rising rates because most issuance is fixed-rate, long-term debt. Corporations, by contrast, are more likely to be hurt by rising short-term rates because they issue more short-term debt.

In addition, the 10-year cumulative average default rate for municipals is lower than that of corporate bonds across all equivalent credit ratings, according to Moody’s. This is most pronounced in speculative-grade debt, where the default rate for municipals has averaged about 6% compared with about 30% for corporates.

The pronounced market movements of early 2022 are creating more attractive entry points for investors in terms of potentially higher after-tax income. With higher yields and wider credit spreads compared with the start of the year, munis appear particularly attractive for those seeking a tax-efficient way to invest.

Visit Municipal Bonds at PIMCO, our central hub for muni content and investments.

David Hammer is a managing director in the Newport Beach office and head of municipal bond portfolio management.

Past performance is not a guarantee or a reliable indicator of future results.

A word about risk: All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Diversification does not ensure against loss.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

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PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2022, PIMCO

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Coronavirus may be linked to cases of severe hepatitis in children

A chain of events possibly triggered by unrecognized infection with the SARS-CoV-2 coronavirus could be causing the mysterious cases of severe hepatitis…

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Coronavirus may be linked to cases of severe hepatitis in children

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(Reuters) – The following is a summary of some recent studies on COVID-19. They include research that warrants further study to corroborate the findings and that has yet to be certified by peer review.

SARS-CoV-2 could be at root of mysterious hepatitis in kids

A chain of events possibly triggered by unrecognized infection with the SARS-CoV-2 coronavirus could be causing the mysterious cases of severe hepatitis reported in hundreds of young children around the world, researchers suggest.

Children with COVID-19 are at significantly increased risk for liver dysfunction afterward, according to a report posted on Saturday on medRxiv ahead of peer review. But most of the children with acute hepatitis – which is generally rare in that age group – do not report a previous SARS-CoV-2 infection. Instead, the majority have been found to be infected with an adenovirus called 41F, which is not known to attack the liver. It is possible that the affected children, many of whom are too young to be vaccinated, may have had mild or asymptomatic COVID infections that went unnoticed, a separate team of researchers suggest in The Lancet Gastroenterology & Hepatology. If that were true, they theorize, then lingering particles of the coronavirus in the gastrointestinal tract in these children could be priming the immune system to over-react to adenovirus-41F with high amounts of inflammatory proteins that ultimately damage the liver.

A firefighter from the Marins-Pompiers of Marseille (Marseille Naval Fire Battalion) administers a nasal swab to a child at a testing site for coronavirus disease (COVID-19) in Marseille, France, September 17, 2020. REUTERS/Eric Gaillard

“We suggest that children with acute hepatitis be investigated for SARS-CoV-2 persistence in stool” and for other signals that the liver damage is happening because the spike protein of the coronavirus is a “superantigen” that over-sensitizes the immune system, they said.

Face-down position unhelpful for awake patients

For hospitalized COVID-19 patients who are breathing on their own but with supplemental oxygen, lying face down might not help prevent them from eventually needing mechanical ventilation, according to a new study.

In the study, 400 patients were randomly assigned to usual care or to standard care plus intermittently lying on their stomach, a position known to improve the course of illness in sedated patients on mechanical ventilators. Over the next 30 days, 34.1% in the prone-positioning group and 40.5% in the usual-care group needed to be intubated and put on a ventilator, a difference that was not statistically significant. There might have been a reduction in the risk for intubation with prone positioning among some of the patients, researchers said on Monday in JAMA, but they could not confirm it statistically from their data. The average duration of prone positioning per day was roughly five hours, less than the target of eight to 10 hours per day.

“Long hours of awake prone positioning are challenging and highly influenced by patient comfort and preference,” the researchers said. “The most common reason for interruption of prone positioning was patient request, which might have been related to overall subjective improvement or related to discomfort from prone positioning.”

Click for a Reuters graphic on vaccines in development.

Reporting by Nancy Lapid and Megan Brooks; Editing by Bill Berkrot

Our Standards: The Thomson Reuters Trust Principles.

 

Reuters source:

https://www.reuters.com/business/healthcare-pharmaceuticals/coronavirus-may-be-linked-cases-severe-hepatitis-children-2022-05-16

 

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The Battle For Control Of Your Mind

The Battle For Control Of Your Mind

Authored by Aaron Kheriaty via The Brownstone Institute

In his classic dystopian novel 1984, George…

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The Battle For Control Of Your Mind

Authored by Aaron Kheriaty via The Brownstone Institute

In his classic dystopian novel 1984, George Orwell famously wrote, “If you want a picture of the future, imagine a boot stamping on a human face—for ever.” This striking image served as a potent symbol for totalitarianism in the 20th Century. But as Caylan Ford recently observed, with the advent of digital health passports in the emerging biomedical security state, the new symbol of totalitarian repression is “not a boot, but an algorithm in the cloud: emotionless, impervious to appeal, silently shaping the biomass.”

These new digital surveillance and control mechanisms will be no less oppressive for being virtual rather than physical. Contact tracing apps, for example, have proliferated with at least 120 different apps in used in 71 different states, and 60 other digital contact-tracing measures have been used across 38 countries. There is currently no evidence that contact tracing apps or other methods of digital surveillance have helped to slow the spread of covid; but as with so many of our pandemic policies, this does not seem to have deterred their use.

Other advanced technologies were deployed in what one writer has called, with a nod to Orwell, “the stomp reflex,” to describe governments’ propensity to abuse emergency powers. Twenty-two countries used surveillance drones to monitor their populations for covid rule-breakers, others deployed facial recognition technologies, twenty-eight countries used internet censorship and thirteen countries resorted to internet shutdowns to manage populations during covid. A total of thirty-two countries have used militaries or military ordnances to enforce rules, which has included casualties. In Angola, for example, police shot and killed several citizens while imposing a lockdown.

Orwell explored the power of language to shape our thinking, including the power of sloppy or degraded language to distort thought. He articulated these concerns not only in his novels Animal Farm and 1984 but in his classic essay, “Politics and the English Language,” where he argues that “if thought corrupts language, language can also corrupt thought.”

The totalitarian regime depicted in 1984 requires citizens to communicate in Newspeak, a carefully controlled language of simplified grammar and restricted vocabulary designed to limit the individual’s ability to think or articulate subversive concepts such as personal identity, self-expression, and free will. With this bastardization of language, complete thoughts are reduced to simple terms conveying only simplistic meaning.  

Newspeak eliminates the possibility of nuance, rendering impossible consideration and communication of shades of meaning. The Party also intends with Newspeak’s short words to make speech physically automatic and thereby make speech largely unconscious, which further diminishes the possibility of genuinely critical thought.

In the novel, character Syme discusses his editorial work on the latest edition of the Newspeak Dictionary:

By 2050—earlier, probably—all real knowledge of Oldspeak [standard English] will have disappeared. The whole literature of the past will have been destroyed. Chaucer, Shakespeare, Milton, Byron—they’ll exist only in Newspeak versions, not merely changed into something different, but actually contradictory of what they used to be. Even the literature of The Party will change. Even the slogans will change. How could you have a slogan like Freedom is Slavery when the concept of freedom has been abolished? The whole climate of thought will be different. In fact, there will be no thought, as we understand it now. Orthodoxy means not thinking—not needing to think. Orthodoxy is unconsciousness.

Several terms of disparagement were repeatedly deployed during the pandemic, phrases whose only function was to halt the possibility of critical thought. These included, among others, ‘covid denier,’ ‘anti-vax,’ and ‘conspiracy theorist’. Some commentators will doubtless mischaracterize this book, and particularly this chapter, using these and similar terms—ready-made shortcuts that save critics the trouble of reading the book or critically engaging my evidence or arguments.

A brief comment on each of these may be helpful in illustrating how they function.

The first term, ‘covid denier,’ requires little attention. Those who sling this charge at any critic of our pandemic response recklessly equate covid with the Holocaust, which suggests that antisemitism continues to infect discourse on both the right and the left. We need not detain ourselves with more commentary on this phrase.

The epithet ‘anti-vax,’ deployed to characterize anyone who raises questions about the mass vaccination campaign or the safety and efficacy of covid vaccines, functions similarly as a conversation stopper rather than an accurately descriptive label. When people ask me whether I am anti-vax for challenging vaccine mandates I can only respond that the question makes about as much sense to me as the question, “Dr. Kheriaty, are you ‘pro-medication’ or ‘anti-medication’?” The answer is obviously contingent and nuanced: which medication, for which patient or patient population, under what circumstances, and for what indications? There is clearly no such thing as a medication, or a vaccine for that matter, that’s always good for everyone in every circumstance and all the time.

Regarding the term “conspiracy theorist,” Agamben notes that its indiscriminate deployment “demonstrates a surprising historical ignorance.” For anyone familiar with history knows that the stories historians recount retrace and reconstruct the actions of individuals, groups, and factions working in common purpose to achieve their goals using all available means. He mentions three examples from among thousands in the historical record.

In 415 B.C. Alcibiades deployed his influence and money to convince the Athenians to embark on an expedition to Sicily, a venture that turned out disastrously and marked the end of Athenian supremacy. In retaliation, Alcibiades enemies hired false witnesses and conspired against him to condemn him to death. In 1799 Napoleon Bonaparte violated his oath of fidelity to the Republic’s Constitution, overthrowing the directory in a coup, assumed full powers, and ending the Revolution. Days prior, he had met with co-conspirators to fine-tune their strategy against the anticipated opposition of the Council of Five Hundred.

Closer to our own day, he mentions the March on Rome by 25,000 Italian fascists in October 1922. Leading up to this even, Mussolini prepared the march with three collaborators, initiated contacts with the Prime Minister and powerful figures from the business world (some even maintain that Mussolini secretly met with the King to explore possible allegiances). The fascists rehearsed their occupation of Rome by a military occupation of Ancona two months prior.

Countless other examples, from the murder of Julius Caesar to the Bolshevik revolution, will occur to any student of history. In all these cases, individuals gathering in groups or parties to strategize goals and tactics, anticipate obstacles, then act resolutely to achieve their aims. Agamben acknowledges that this does not mean it is always necessary to aver to ‘conspiracies’ to explain historical events. “But anyone who labelled a historical who tried to reconstruct in detail the plots that triggered such events as a ‘conspiracy theorist’ would most definitely be demonstrating their own ignorance, if not idiocy.”

Anyone who mentioned “The Great Reset” in 2019 was accused of buying into a conspiracy theory—that is, until World Economic Forum founder and executive chairman Klaus Schwab published a book in 2020 laying out the WEF agenda with the helpful title,Covid-19: The Great Reset. Following new revelations about the lab leak hypothesis, U.S. funding of gain-of-function research at the Wuhan Institute of Virology, vaccine safety issues willfully suppressed, and coordinated media censorship and government smear campaigns against dissident voices, it seems the only difference between a conspiracy theory and credible news was about six months.

*  *  *

Originally posted at 'Human Flourishing' Substack.

Tyler Durden Mon, 05/16/2022 - 23:45

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World-first study reveals why people with COPD are more susceptible to COVID-19

Researchers from the Centenary Institute and the University of Technology Sydney have published the first study showing why people with chronic obstructive…

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Researchers from the Centenary Institute and the University of Technology Sydney have published the first study showing why people with chronic obstructive pulmonary disease (COPD) are at higher risk of developing severe COVID-19.

Credit: Centenary Institute

Researchers from the Centenary Institute and the University of Technology Sydney have published the first study showing why people with chronic obstructive pulmonary disease (COPD) are at higher risk of developing severe COVID-19.

The findings, reported in the American Journal of Respiratory and Critical Care Medicine, could lead to the development of new therapeutic interventions that reduce COVID-19 infection in COPD patients.

An inflammatory lung condition, COPD causes airway blockage and makes it difficult to breathe. It affects around 400 million people globally. The increased susceptibility to COVID-19 of COPD patients is still to be fully understood.

In the study, the researchers infected differentiated airway cells from COPD patients and healthy people with SARS-CoV-2 (the virus that causes COVID-19).

The researchers found that the COPD airway cells had 24-fold greater infection with SARS-CoV-2 than the healthy cells.

“We examined the genetic information of infected cells through advanced single cell RNA-sequencing analysis,” said lead author of the study, Dr Matt Johansen, from the Centenary UTS Centre for Inflammation.

“Seven days after SARS-CoV-2 infection, there was a 24-fold increase of viral load in the COPD patient airway cells compared to the cells taken from healthy individuals.”

Significantly, the team found that the infected COPD cells had increased levels of transmembrane protease serine 2 (TMPRSS2) and cathepsin B (CTSB). Both are enzymes that SARS-CoV-2 uses to enter into the host cell.

“These two enzymes are increased in COPD patients and favour greater SARS-CoV-2 infection compared to healthy people. Simply put, easier and increased cell infection makes it far more likely that individuals with COPD will have more severe disease outcomes,” said Dr Johansen.

Other results from the study showed additional reasons for COPD patient susceptibility to severe COVID-19.

Key anti-viral proteins (interferons) that protect against infection were largely blunted in the COPD patient airway cells. This was a likely trigger in causing increased viral production in COPD patients.

Dr Johansen said that infected COPD patient airway cells also had higher levels of pro-inflammatory cytokines, which are linked to more severe COVID-19 and COPD outcomes.

“COPD is an inflammatory disease with patients having increased inflammation at baseline compared to healthy people. It’s highly likely that SARS-CoV-2 exacerbates this existing high inflammation level which leads to even poorer outcomes,” he said.

Initial laboratory drug testing by the researchers, to inhibit the enzymes TMPRSS2 and CTSB, and to target the high inflammation levels, successfully and substantially reduced SARS-CoV-2 viral levels in COPD patient cells, ultimately confirming the study’s results.

“Collectively, these findings have allowed us to understand the mechanisms of increased COVID-19 susceptibility in COPD patients,” said Professor Phil Hansbro, the study’s senior author and Director of the Centenary UTS Centre for Inflammation.

“We believe that new drug treatments targeting relevant enzymes and pro-inflammatory responses in SARS-CoV-2 infection could have excellent therapeutic potential in reducing the severity of COVID-19 in patients with COPD.”

Professor Hansbro said the research was critical with hundreds of millions of people affected by COPD globally and with COVID-19 likely to be around for many years to come.

[ENDS]

Publication:

Increased SARS-CoV-2 Infection, Protease and Inflammatory Responses in COPD Primary Bronchial Epithelial Cells Defined with Single Cell RNA-Sequencing.

https://www.atsjournals.org/doi/10.1164/rccm.202108-1901OC

Images:

Dr Matt Johansen: https://drive.google.com/file/d/1Wc5WxHcS1fSWE68Q7xu8jT53Dki2ZBo4/

 

Professor Phil Hansbro:

https://drive.google.com/file/d/1GaHOyCjXfSb3hsE_bS-g2Cxs81dEhL4G/

 

For all media and interview enquiries, please contact

Tony Crawshaw, Media and Communications Manager, Centenary Institute on 0402 770 403 or email: t.crawshaw@centenary.org.au

 

About the Centenary Institute

The Centenary Institute is a world-leading independent medical research institute, closely affiliated to the University of Sydney and the Royal Prince Alfred Hospital. Our research focuses on three key areas: cancer, inflammation and cardiovascular disease. Our strength lies in uncovering disease mechanisms and applying this knowledge to improve diagnostics and treatments for patients.

For more information about the Centenary Institute, visit centenary.org.au

 

About the University of Technology Sydney (UTS)

The University of Technology Sydney (UTS), located in central Sydney, is one of

Australia’s leading universities of technology. It is known for fusing innovation, creativity

and technology in its teaching and research and for being an industry-focused university.

For more information go to uts.edu.au


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