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Investment Ideas 2022: Explore three key themes dominating markets where investors might uncover potential opportunities. Read More



November 8, 2022  |  4 Minute Read

Scott Diamond

Co-Head of GSAM Municipal Fixed Income

Scott Diamond

Michael Zinman

Head of High Yield Municipal Bond Research

Michael Zinman

The great re-pricing of interest rates has pushed municipal bond yields across the credit spectrum to their highest levels in nearly two decades. While we believe they are attractive on an absolute basis, yields at these levels may be particularly enticing for investors in the top tax bracket. In our view, this includes high yield municipal debt, an idiosyncratic corner of the muni market that we believe deserves a fresh look.


Municipal yields are approximately 300 basis points higher across all segments of the market. On a tax-equivalent basis, the yields are even more attractive—particularly so in lower-rated segments of the market; high yield debt offering a tax-equivalent yield of 10.6%. 



Exhibit 1: Municipal Bond Yields Have Risen Across Credit Sectors


Source: Bloomberg as of September 30, 2022. The Bloomberg Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market. HY Muni represents the High Yield Municipal portion of the Bloomberg Municipal Bond Index. “Tax-equivalent yield” refers to yield divided by one minus the current tax rate. A 40.8% tax rate is used to calculate tax-equivalent yield for current period. Past performance does not guarantee future results, which may vary. For illustrative purposes only. Please see additional disclosures at the end of this presentation.



High yield munis have over the last 20 years exhibited a 0.3 correlation to the S&P 500, substantially lower than the 0.75 correlation of the high yield corporate bond market.  And over 5-year rolling periods, municipal high yield has delivered equity like returns on a tax-equivalent basis (Exhibit 2).



Exhibit 2: Equity-Like Returns on a Tax-Equivalent Basis


Source: Goldman Sachs Asset Management and Bloomberg as of September 30, 2022. The Bloomberg Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market. HY Muni represents the High Yield Municipal portion of the Bloomberg Municipal Bond Index. “Tax-equivalent yield” refers to yield divided by one minus the current tax rate. A 35% tax rate was used to calculate tax-equivalent yield for current period. Average rolling returns calculated based on trailing 25 years. Past performance does not guarantee future results, which may vary. For illustrative purposes only. Please see additional disclosures at the end of this document.



More than Income: Credit Health Looks Attractive, Defaults Are Down

Beyond income potential, we believe municipal credit remains strong thanks in part to continued solid growth of state and local taxes. After increasing by more than 16% and 11%, respectively, in 2021, income and sales taxes have grown by another 18% and 12% in first half of 2022.1 Those increases, along with the federal government’s $350 billion Coronavirus State and Local Fiscal Recovery Funds program (2020), have led to record cash reserves for many states and localities. Even if projected budget gaps are fully realized this fiscal year, state reserves as a percentage of expenditures will be at their highest levels in more than at least 20 years. We expect near-term credit ratings stability even in the face of inflationary headwinds.


Additionally, first-time municipal bond defaults are well off their 2020 peak and are tracking down nearly 40% as measured by par through the first ten months of 2022 on a year-over-year basis.  In the $4 trillion municipal bond market, first-time defaults this year are just over $ 1 billion.2


One-off distressed scenarios are possible with individual issuers given the rise in highly leveraged deals that was stimulated by historically low interest rates. Still, we believe defaults will remain manageable in the short run and generally isolated to the project finance sector, which includes a variety of highly speculative, unique credits such as mega-malls, waste-to-energy facilities, and start-up sports complexes. It’s important, in our view, to focus on fundamental research to identify the most compelling potential opportunities, and that’s particularly important today given a fluid economic backdrop.


Healthcare in the Spotlight

We see some attractive opportunities in the healthcare sector, which has managed higher-than-normal operating expenditures stemming from pandemic-related staff shortages and, more recently, rising inflation. While hospitals have started to see some price pressures ease, labor costs remain elevated compared to long-run levels. Separately, nursing home occupancy percentages have yet to rebound to their pre-pandemic levels of 92%, having plateaued around 86%.3 The subsequent pressure on healthcare operating margins and erosion of cash reserves has led to an increase in credit rating downgrades across the hospital sector and an uptick in nursing home defaults. But we believe the sector offers some potential long-term opportunities for investors who can take a careful and selective approach.


With income top of mind for many investors, we think there is value to be found in municipal credit for dynamic and active investors. Past periods of disruption in the Muni market in general and among high yield munis in particular have often been attractive entry points for long-term investors. For investors who can take the long view, we think that’s true today as well.



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1 Source: US Bureau of Economic Analysis (BEA) as of September 30, 2022

2 Source: BofA Global Research as of October 30, 2022

3 Source: Ziegler as of September 30, 2022


Risk Considerations:

Investments in fixed-income securities are subject to credit and interest rate risks.  Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price.

Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).

High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities.


General Disclosures

The Bloomberg Municipal Bond Index is an unmanaged index considered representative of the broad market for investment-grade municipal bonds. Bonds in the index have remaining maturities of at least one year.

The Bloomberg Municipal High Yield Bond Index is an unmanaged index that tracks non-investment grade and non-rated municipal bonds. It is not possible to invest directly in an unmanaged index.

The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices.


Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness.  We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Correlation is a measure of the amount to which two investments vary relative to each other.  Past correlations are not indicative of future correlations, which may vary.

Date of First Use: November 04, 2022.  297040-OTU-1696927

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