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:

 

Inflation

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.”

Lower-Quality Bonds

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.”

Health Care

3. Health Care

Health care is one lower-quality bond sector that Wimmel likes.

“The average quality of a hospital is lower than the average quality of public transportation — so you’ll find more BBB and A rated bonds in the health care index,” Wimmel said.

Concerns about the municipal hospital sector have ticked up again with the American Health Care Act passing the House, according to BMO. However, Wimmel and his team do not believe there will be widespread underperformance of hospital bonds if the Senate and the House can pass a unified bill.

If any weakness develops, Wimmel and his team will look for undervalued securities in the health care sector.

Illinois

4. Illinois

Wimmel and his team continue to look for opportunities to invest in the state of Illinois general obligation bonds and bonds issued by the city of Chicago for their diversified mutual funds.

The state may suffer a downgrade to non-investment grade by the rating agencies if it does not reach a budget agreement by the end of June 2017 — and Wimmel thinks this is highly likely.

“Illinois is being so well covered by the media outlets that it shouldn’t be a shock to investors when/if they’re downgraded at the end of this month to non-investment grade, which will be the first time ever,” Wimmel said. “I think that will likely happen. I don’t see any movement right now between [Gov. Bruce Rauner] and [House] Speaker [Michael] Madigan.”

After the news that Illinois may be downgraded, prices on these bonds slid quickly. But Wimmel doesn’t think a potential downgrade will have a big impact on many investors.

“We’ll see what the reaction is in the municipal market. I don’t think it will be that strong,” he said. “I’m sure it will have a big headline, but I haven’t received as many inquiries into our Illinois holdings [as] I thought we should.”

—Related on ThinkAdvisor: