What a difference a year makes. Following a challenging 2022, the municipal bond market is stabilizing, yet it continues to offer attractive investment opportunities. Industry fund flows have been mixed, but the pace of outflows has slowed considerably since last year. Today we observe a firmer trading tone characterized by improvements in liquidity and the two-way flow of capital. The result is that the market is once again rewarding investors for selecting fundamentally-sound securities based on relative value. Notwithstanding these positive developments, MacKay Municipal Managers remains constructive on the market. In a welcome reprieve for income investors, high grade municipal bond yield levels are at or near their highest levels in a decade. Moreover, municipal income streams are improved from a credit risk-adjusted standpoint. With a market largely comprised of tax-backed state and local debt issuers and essential service providers, we believe municipals are an attractive late-cycle asset class. Many municipal issuers prudently restored their emergency reserves and reduced liabilities following a few years of strong revenue collection. We believe positive credit trends and, for those managers who have taken advantage of the opportunity, the attractiveness of current income streams will continue to anchor the municipal market during the second half of 2023.
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Shown for illustrative purposes only. Assumes a U.S. taxable investor who pays U.S. Federal income tax rates at the highest current marginal rate of 37.0% and the 3.8% Medicare surcharge tax on income. There are limitations to presenting tax-equivalent yields including, but not limited to (i) they do not show the effect of state and local taxes, which will vary; and (ii) each individual taxpayer may possess unique circumstance that could alter the computation of tax-equivalent yields. Thus “tax-equivalent yields” are only intended to represent mathematical illustrations and not actual returns to any investor. Prospective investors cannot rely on this illustration as it is not possible to invest directly in an index, and not every investor would have the same return experience in investable products or strategies. See disclosures at the end of this document for information related to comparisons to an index and index descriptions.
This illustration and nothing herein constitute tax advice. The information contained herein should not be used as a substitute for advice from your tax advisor. Neither MacKay Municipal ManagersTM nor MacKay Shields LLC advise clients on tax matters. Consult your tax advisor for further information.
It is not possible to invest directly in an index. Past performance is not indicative of future results. Please see disclosures for index descriptions.
* Indices: Bloomberg Municipal Bond Index, Bloomberg Municipal High Yield Index, Bloomberg U.S. Corporate Bond Index, Bloomberg U.S. Corporate High Yield Index
**Includes States, Local Governments, Public Power, and Water & Sewer sectors.
*** Indices: Bloomberg Municipal BBB Index (BBB-rated municipal bond index) and Bloomberg High Yield Municipal Index. It is not possible to invest directly in an index. Please see disclosures for index descriptions.
**** Indices: Bloomberg Municipal Long 22+ Year Index, Bloomberg Municipal 1-Year Index, Bloomberg Municipal Long 3-Year Index, Bloomberg Municipal 5-Year Index. It is not possible to invest directly in an index. Please see disclosures for index descriptions.
***** Indices: ICE BofA Broad U.S. Taxable Municipal Securities Index, ICE BofA U.S. Municipal Securities index. It is not possible to invest directly in an index. Please see disclosures for index descriptions.
MacKay Shields LLC does not offer or sponsor any funds registered under the Investment Company Act of 1940, as amended (“Registered Funds”). MacKay Shields LLC serves in the capacity as investment manager of certain Registered Funds through sub-advisory arrangements.
Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers, and the possibility of future tax and legislative changes which could affect the market for and value of municipal securities. Such uncertainties could cause increased volatility in the municipal securities market and could negatively impact the Fund’s net asset value and/or the distributions paid by the Fund. Securities purchased by the Fund that are liquid at the time of purchase may subsequently become illiquid due to events relating to the issuer of the securities, market events, economic conditions, or investor perceptions.
Liquidity risk is the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. The Fund may not be able to pay redemption proceeds within the allowable time period because of unusual market conditions, unusually high volume of redemptions, or other reasons. To meet redemption requests, the Fund may be forced to sell securities at an unfavorable time and/or under unfavorable conditions.
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“Bloomberg®”, “Bloomberg Indices®”, Bloomberg Fixed Income Indices, Bloomberg Equity Indices and all other Bloomberg indices referenced herein are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by MacKay Shields LLC (“MacKay Shields”). Bloomberg is not affiliated with MacKay Shields, and Bloomberg does not approve, endorse, review, or recommend MacKay Shields or any products, funds or services described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to MacKay Shields or any products, funds or services described herein.
Bloomberg Municipal High Yield Index is an unmanaged index of municipal bonds with the following characteristics: fixed coupon rate, credit rating of Ba1 or lower or non-rated using the middle zating of Moody‘s, S&P, and Fitch, outstanding par value of at least $3 million, and issued as part of a transaction of at least $20 million. Bloomberg U.S. Taxable Municipal Index is a rules-based, market-value-weighted index engineered for the long-term taxable bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies if all three rate the bond: Moody‘s, S&P, Fitch. Bloomberg Municipal Bond Index: a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market. Bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two ratings agencies. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Bloomberg AAA-, AA-, A-, and BBB-Rated Municipal Bond Indexes are sub-indexes of the Bloomberg Municipal Bond Index. ICE BofA U.S. Taxable Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade taxable municipal securities publicly issued in the U.S. domestic market. ICE BofA Broad U.S. Taxable Municipal Securities Index tracks the performance of U.S. dollar denominated debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. Bloomberg U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers. Bloomberg U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included. Must have at least one year to final maturity regardless of call features. Must have at least $150 million par amount outstanding. Must be rated high-yield (Ba1/BB+ or lower) by at least two of the following ratings agencies: Moody's, S&P, Fitch. Must be fixed rate, although it can carry a coupon that steps up or changes according to a predetermined schedule. Must be dollar-denominated and non-convertible. Must be publicly issued.
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