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May 11, 2023  |  4 Minute Read

Sylvia Yeh

Co-Head of Municipal Fixed Income

Sylvia Yeh

Scott Diamond

Co-Head of Municipal Fixed Income

Scott Diamond

Matt Wrzesniewsky

Fixed Income Strategist

Matt Wrzesniewsky

After last year’s re-pricing in fixed income, yield is back, yet cash remains on the sidelines and recent banking sector stress has led investors to seek safety in money market funds.


While many investors may have found a quick fix in cash, they could be missing out on a longer-term opportunity to lock in historically attractive rates. Against a backdrop of market moving headlines, the bond market remained resilient in the first quarter and posted another quarter of positive returns for investors. While timing markets can be challenging, we think the upcoming market environment presents several factors that make municipal bonds attractive in the coming months.


1. The summer redemption and reinvestment period should further support municipal market technicals.

Historically, the spring has been an attractive time to put money to work in municipal bonds, as the months of April and May have some of the lowest reinvestment totals and typically diminished demand. Conversely, the summer months have tended to represent the largest percentage of maturing bonds during the calendar year, making it more challenging to find supply at a good value and leading to favorable to returns. Therefore, we believe spring is the time to look to munis. 



Exhibit 1: Summer Technicals Historically Lead to Outperformance


Source: Bloomberg and Goldman Sachs Asset Management as of April 28, 2023. Past performance does not guarantee future results, which may vary.



2. Municipal bonds, including municipal high yield, have historically been profitable following the end of a hiking cycle.

We’re finally seeing signs that the Federal Reserve (Fed) may be nearing the end of its hiking campaign. This year, the Fed downshifted to quarter point hikes and delivered another quarter point increase in May’s meeting. Investing in longer-term bonds—like municipals or even municipal high yield—has historically been a profitable investment following the end of a hiking cycle. And with many investors seeking to add duration to portfolios, we believe longer term munis and municipal high yield are poised to outperform. Additionally, the muni market boasts an upward sloping curve from the intermediate range to longer-term maturities. 



Exhibit 2: Two Roads Diverge


Source: Bloomberg and Goldman Sachs Asset Management as of April 28, 2023. The chart shows the tax-equivalent yields of US Treasury and investment grade municipal bonds at various maturities. US Treasury tax-equivalent yields are calculated by deducting California state income tax rate of 13.3%. Municipal bond tax-equivalent yields are calculated by deducting federal income tax rate of 40.8%.


Exhibit 3: Looking Long with Munis


Source: Bloomberg and Goldman Sachs Asset Management as of April 28, 2023. Yields and performance of Bloomberg Municipal Bond Index, Bloomberg Long Term Municipal Bond 22+ Index, and Bloomberg Municipal High Yield Bond Index are shown. Past performance does not guarantee future results, which may vary.


3. Apart from summer technicals and longer duration, municipals boast strong credit fundamentals.

While volatility toward the end of second quarter stoked fears about the banking sector and overall financial stability, municipal credit has remained resilient. Robust revenue growth and COVID-related federal monies have led to near-record reserves for municipalities. States and local governments are well-positioned to withstand inflationary-related expenditure pressures, a potential slowdown or even elevated borrowing costs. In all, ample cash lends support and budgetary flexibility—an important fundamental that underpins the asset class.


From a credit perspective, many segments of the high yield market are on stronger footing than they were in the past. For example, Puerto Rico debt has been largely restructured and leverage in the tobacco space has been significantly reduced due to refinancings. We do not see systemic risk to high yield munis, even if the economy has a harder landing than many are currently predicting. From a market technical perspective, we expect muni primary market volumes—and high yield issuance in particular—to remain subdued, which should add to strong credit fundamental tailwinds.


Overall, we believe municipal bonds are attractive and offer investors long-term opportunities. With the Fed nearing a potential pause and the municipal bond market underpinned by strong fundamentals as we near the summertime, today’s opportunities may not last as many investors look to lock-in longer-term rates.  





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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, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities

Index Definitions

The Bloomberg U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

The Bloomberg Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market.

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

General Disclosures


This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

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.

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.

The performance of a new or smaller fund may not represent how the fund will perform in the future. A new or smaller fund may buy smaller-sized bonds known as “odd lots”, which may be sold at a discount to similar “round lot” bonds, that the fund may not buy as the fund grows in size. All positions are marked at “round lot” prices in calculating NAV and performance. New funds have limited performance histories for investors to evaluate. There is no guarantee that any fund, including a fund with high or unusual performance for one or more periods of time, will perform similarly in the future.

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.

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.

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.

Date of first use: May 3, 2023.   317396-OTU-1793029.

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