Robert Wimmel, head of municipal fixed income for BMO Global Asset Management, recently discussed with ThinkAdvisor four trends in the muni market that he's keeping an eye on.
"We don't pay attention to weekly releases. We're looking for trends in the market. That's really the best way to invest — to look for the trends, ignore the daily and weekly noise," Wimmel said.
Wimmel manages the tax-exempt fixed income team, overseeing assets in the BMO Intermediate Tax-Free Fund, the BMO Short Tax-Free Fund, the BMO Ultra Short Tax-Free Fund and separately managed accounts. Here, he says, are the trends to watch:
1. Inflation
"At the beginning of the year you had the big reflation trade, everybody thought inflation was going to creep up," Wimmel said. "That is nowhere to be seen. Inflation expectations are low. Inflation is low."
Wimmel expect inflation to remain "tame" for the near future. And he thinks the Federal Reserve is thinking the same.
"I think, it's a longer time frame than most people would expect that the Fed is looking at any kind of inflation over 2%," he explained. "They're not looking at it for this year. Maybe some time next year they hope to get there."
2. Lower-Quality Bonds
Lower-quality investment-grade bonds posted the best performance year to date, according to BMO. Wimmel and his team continue to look for — and buy — undervalued A and BBB rated bonds.
The higher yield of the lower-quality bonds helps the long-term performance of these bonds. Also, price appreciation on undervalued bonds helps longer-term performance as well.
Despite some noise around the economy, Wimmel says he still likes lower-quality bonds because he doesn't see any fear of credit spreads widening out.
"There is no recession on the horizon. The economy's been going fine," Wimmel told ThinkAdvisor. "I try to understand why people are so concerned about the economy. It's growing at a decent rate, it's just less than it used to be, but it's still growing. Employment, granted it's not the type of full employment perhaps we've had in the past, but it's definitely full employment. So, I don't see any fear of credit spreads widening out."
