The municipal bond market’s evolution over the last 10 years may create a large and diverse opportunity set for investors. We believe a well-managed municipal bond portfolio may offer attractive yield potential, high credit quality and diversification in a broader portfolio, especially within a core fixed income allocation.
The municipal bond market has evolved significantly over the last decade. Historically, many municipal bonds were backed by insurance, which resulted in AAA credit ratings and a high correlation to US government bonds. Today, few municipal bonds are backed by insurance, increasing the diversity of municipal bond credit ratings while reducing their correlation to government bonds. We think this evolution may create attractive yield and diversification opportunities for active municipal bond investors.
When adjusted for taxes, municipal bonds have historically offered higher yield potential than other bonds with high credit quality, even with new tax rates.
Municipals have seen significantly lower default rates relative to similarly rated corporate bonds.
We believe municipal bonds can enhance the diversification of a broader portfolio, especially within core fixed income.
Annual Returns for Fixed Income Indices
View historical performance relative to:
Source: Morningstar, Bloomberg, and GSAM. As of 12/31/17.
Past performance does not guarantee future results, which may vary. It is not possible to invest directly in an unmanaged index. Diversification does not protect an investor from market risk and does not ensure a profit.
Bank Loans are represented by the Credit Suisse Leveraged Loan Index, which tracks the investable leveraged loan market by representing tradable, senior-secured, US-dollar denominated, non-investment-grade loans.
Emerging Markets Debt is represented by the JPM EMBI Global Diversified Index, an unmanaged index tracking dollar-denominated debt instruments issued in emerging markets.
Global Aggregate Bonds are represented by the Bloomberg Barclays Global Aggregate Bond Index, an unmanaged index which provides a broad-based measure of the global investment-grade fixed-rate debt markets and covers the most liquid portion of the global investment grade fixed-rate bond market, including government, credit and collateralized securities.
Global Aggregate Bonds (USD Hedged) are represented by the Bloomberg Barclays Global Aggregate Bond Index hedged to the US dollar, an unmanaged index which provides a broad-based measure of the global investment-grade fixed-rate debt markets and covers the most liquid portion of the global investment grade fixed-rate bond market, including government, credit and collateralized securities.
High Yield Municipals are represented by the Bloomberg Barclays High Yield Municipal Bond Index, an unmanaged index made up of bonds that are non-investment grade, unrated, or rated below Ba1 by Moody’s Investors Service with a remaining maturity of at least one year.
Local Emerging Markets Debt is represented by the JP Morgan GBI-EM Global Diversified Index, a comprehensive emerging market debt benchmark that tracks local currency bonds issued by emerging market governments.
Municipals are represented by the Bloomberg Barclays US Municipal Index, which covers the USD- denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
US Aggregate Bonds are represented by the Bloomberg Barclays US Aggregate Bond Index, which represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment-grade corporate bonds, and mortgage-backed and asset-backed securities.
US High Yield Corporates are represented by the Bloomberg Barclays US Corporate High Yield Bond Index, 2% Issuer Capped, which covers the universe of US dollar denominated, non-convertible, fixed rate, non-investment grade debt.
US Investment Grade Corporates are represented by the Bloomberg Barclays US Corporate Bond Index, which measures the investment grade, fixed-rate, taxable corporate bond market including USD-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.
US Treasuries are represented by the Bloomberg Barclays US Treasury Index, which measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Equity securities are more volatile than fixed income securities and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies. Investments in fixed income securities are subject to the risks associated with debt securities generally including credit, liquidity and interest rate risk. Investments in 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. Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets. An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Although Treasuries are considered free from credit risk, they are subject to interest rate risk, which may cause the underlying value of the security to fluctuate. Municipal Securities are subject to credit/default risk, interest rate risk and certain additional risks. They may be more sensitive to adverse economic, business or political developments if it invests a substantial portion of its assets in the bonds of similar projects (such as those relating to education, health care, housing, transportation, and utilities), industrial development bonds, or in particular types of municipal securities (such as general obligation bonds, private activity bonds and moral obligation bonds).
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 GSAM 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 GSAM has no obligation to provide any updates or changes.
GSAM has been managing municipal bond assets for clients for nearly three decades, with $42.5 billion in assets under supervision as of March 20181. Our team of 17 investment professionals dedicated to municipal bonds, including seven analysts focused on municipal credit research.
GS Short Duration Tax-Free Fund
Seeks high quality, short-term tax-free income
Morningstar Risk-Adjusted Ratings: GS Short Duration Tax-Free Fund (Muni National Short Category) - Class I Shares 3 Year 4 stars out of 179 funds, 5 Year 4 stars out of 158 funds, 10 year 3 stars out of 100 funds.
GS Dynamic Municipal Income Fund
Seeks to optimize tax-free total return through an active, flexible approach
Morningstar Risk-Adjusted Ratings: GS Dynamic Municipal Income Fund (Muni National Intermediate Category) - Class I Shares 3 Year 5 stars out of 256 funds, 5 Year 5 stars out of 228 funds, 10 year 5 stars out of 147 funds.
GS High Yield Municipal Fund
Seeks a high level of tax-free income by investing across high yield and investment grade credit
Morningstar Risk-Adjusted Ratings: GS High Yield Municipal Income Fund (High Yield Muni Category) - Class I Shares 3 Year 5 stars out of 154 funds, 5 Year 5 stars out of 126 funds, 10 year 5 stars out of 79 funds.
Quarterly Fund Update