As the Fed publicly discusses it is nearing the end of its emergency approach to the pandemic and begins scaling back its pace of securities purchases, we thought it would be a good time to review the current status of the municipal market and potential outcomes for the 4th quarter.

Municipal yields – and bond yields in general – have stagnated since the early spring even though economic growth is robust and inflation readings are high. The market has largely looked through these metrics, as many believe this dynamic will be short-lived. What underpins this stance is the view that growth and inflation metrics are simply boosted by fleeting catalysts such as supply chain bottlenecks and one-time federal stimulus measures. The immense presence of the Fed’s growing balance sheet has served as further support for current market yields, as well.

Municipal yields have trended sideways since mid-summer. The market has experienced robust demand as many investors rebalance out of the equity market following another year of outsized gains. Muted new issue supply, coupled with expectations for higher tax rates, has swelled demand, as well.


Valuation Outlook

At the moment, the ratio of AAA rated 10-year municipal bond yields (0.94%) relative to the taxable 10-year treasury bond yield (1.32%) sits around 71%. This compares to a pre-COVID crisis level average of 83%. So relative to pre-crisis levels, today’s municipal yields are lower vis-à-vis treasuries. Given the current backdrop mentioned above and very strong underlying credit fundamentals for the majority of state and local governments, we expect the ratio to remain in 70-80% range through year-end.

During the previous Fed tightening cycle, municipal valuations tightened. There were certainly bouts of volatility, but over 6 years the 10-year ratio moved lower from 105% in May of 2013 (when the Taper Tantrum began) to 72% in the period right before the COVID-19 outbreak. During this time, the Fed hiked short-term rates from 0.25% to 2.50% and reduced its balance sheet by $700 billion from its height.[1]

Though valuations may be tight from past history, ample spread is still available across the yield curve for smaller-to-medium sized issuers. For income-oriented investors, we believe portfolios should be overweight these types of solid quality issuers within a separate account structure.


Credit Outlook

Credit security (i.e. principal preservation) is a primary reason for investing in municipals and we forecast continued stability in this metric through the end of the year. That said, due to ongoing concerns about COVID-19, tax revenues may continue to be pressured within certain issuers that are dependent on tourism, urban commercial property, and urban transit. Alternatively, suburban and many non-metro credits will continue to benefit from the millennial generation’s march to the suburbs and their demand for larger housing footprints. These locales will also continue to derive benefits from families working in hybrid work-from-home environments.


Duration Outlook

Duration positioning within the fixed income market – and likely most assets classes in general – will be a very important aspect of portfolio construction over the next 6-12 months. We seek to protect portfolios from excessive duration risk through the ladder maturity structure. This strategy diversifies portfolios across the yield curve while maintaining a conservative average maturity. Additionally, it establishes a level of discipline to stay invested and helps us avoid the mistake of attempting to time the next cycle.

Investors should also take heart in the typical relationship of municipal bond yields to treasury yields, in that they tend not to move in lockstep. Our regression analysis showed that for every 100 basis point (1.00%) increase in the 10-year treasury yield, the mean increase in the 10-year municipal yield was 0.82%, which means municipals are less volatile when compared to treasury bonds.


As we enter the 4th quarter of 2021, the Fed’s role continues as the main ingredient in market fluctuations. Overall, we remain optimistic on municipal credit with the essential purpose and essential revenue sectors. We expect current valuations to hold in the current ranges of recent months, though the market could experience higher levels of volatility as the Fed begins stepping off the pedal of its easy monetary policies.


Matt Bernardi
Vice President
Bernardi Securities & Bernardi Asset Management


[1] Source:

The two main ingredients determining long-term bonds yields are future growth and inflation expectations. Yields have dropped significantly the past number of months as investors have come around to the Fed’s view of high inflation as transitory and the expectation of muted long-term growth projections.

Over the past four months, the 10-year Treasury Note has moved from over 1.70% to under 1.35%. Average yields for 10-year AA rated municipals are 0.99% (taxable equivalent at the 37% bracket is 1.57%). The tax-exempt yield is roughly 75% of treasuries, which is a reasonable valuation relative to historical levels, current market fundamentals, and the potential for higher tax rates.

It is impossible to know if the market’s and Fed’s subdued view on growth and inflation will ultimately be correct. In terms of growth potential, debt (high) and demographics (older and low fertility rates) are major weights on the economy and support the view that long term growth will remain low relative to past experience. This view is corroborated by Japan’s experience and has played out in its domestic financial markets in two ways:

1. Low Yields: Japan’s 10-year treasury is 0.019% (nearly zero)

Click to zoom in on the graphic below. Reference the “Yld” column for Japan under Asia/Pacific. As you will see, negative yields are present in many European countries’ 10-year debt, as well.

Source: Bloomberg

2. Poor stock market returns:
Since the Japanese economy peaked in the 1980s their benchmark stock index (Nikkei) is still well below all-time highs.

Source: Bloomberg

Today’s high levels of fiscal and monetary policy stimulus, and low yields are supportive of high valuations for asset classes across the board, including real estate and the stock market. If you click the link, you’ll notice the Shiller PE Ratio is nearing an all-time high. This ratio was created by Yale economist Robert Shiller and graphs the price to earnings ratio based on average inflation-adjusted earnings from the previous 10 years.

Stocks currently benefit from low yields as:

  • Corporations can fund debt at low levels
  • They enhance relative valuations as: i.) the S&P dividend ratio seems attractive relative to bonds, thereby boosting stock prices and ii.) the P/E multiple of stocks can move higher as P/E ratio of bonds moves higher (price/yield)
  • Discounted cash flow models (a way to value stocks) price the current value of stocks higher when the discount rate (yield) is lower

As the Fed continues to push the pedal to the metal with easy money, this rising tide is lifting all boats (prices).

There are three potential pathways forward in terms of yields:

1. Should we move into a Japan-like scenario, bond prices will continue to benefit (stocks probably not so much). Disinflationary/deflationary economies are good for bond prices (and vice versa).

2. Should the market (and Fed) be wrong, and inflation is here to stay, we believe our laddered portfolios can weather the storm and, over time, take advantage of gradually increasing yields.

The inflationary environment of the late 1970s to mid-80’s took nearly 10-years for the cycle to play out. This is ample time for a laddered portfolio to naturally reorient itself at higher rate levels due to principal/coupon reinvestments.

That said – in all likelihood – the Fed learned its Volker-taught lesson of this time period. Therefore, it would not allow high levels of inflation to persist for such a long time and would quickly stamp this out through monetary tightening policies.

Source: Bloomberg


3. We stay at current levels:

Currently, municipal valuations are relatively attractive to other high-grade fixed income asset classes.

Below is a yield curve comparison depicting yields (from highest to lowest) for:

  • Taxable equivalent yield (37%) of a recent tax-exempt Bangor, WI Electric Utility Revenue issue: This is for example only and demonstrates the types of bonds we invest in for our clients. 
  • AA rated Corporate Benchmark (Bloomberg)
  • Taxable equivalent yield (37%) of the tax-exempt municipal benchmark (MMD)
  • Treasury yields
  • (Dotted) Tax-exempt municipal AA rated benchmark (MMD)

Munis remain attractive in yield and credit quality. A recent Moody’s Default Report[1] noted that:

  • There were no virus-related municipal bond defaults in 2020
  • Municipal ratings were resilient to virus-related pressures…while corporate ratings experienced more frequent rating downgrades
  • Municipal credits continue to remain highly rated

Diversification is key in this environment. Both in terms of asset classes and one’s bond portfolio maturity range. And relatively speaking, municipals remain a very attractive high-grade fixed income asset class when considering both yield and safety.

Relative to other asset classes, bonds will provide a safe-haven in a low inflation/deflationary environment and should not experience the same levels of volatility as stocks during uncertain/bad economic climates. Yields are low given the Fed’s activity in the market, though as I noted above, all asset classes are artificially stimulated given this activity.

If you have any questions regarding your portfolio or the market in general, don’t hesitate to reach out to your Investment Specialist or Portfolio Manager.



Matt Bernardi
Vice President


[1] Moody’s Investors Service: US municipal bond defaults and recoveries, 1970-2020; July 9th, 2021

The past year and half presented many challenges, but also a multitude of silver-linings and learning experiences. Within the municipal bond market, the experience verified the sector’s overall creditworthy reputation and balance sheet sturdiness. Federal monetary and fiscal policy intervention certainly have helped, though most states projected balanced budgets prior to the latest round of direct fiscal aid.[1] Furthermore, prior to the sharp economic recovery – catalyzed by reopening, Federal aid, and loose monetary policy – most states and localities were dealing with the crisis in stride through job cuts, project delays, draws on cash reserves, debt refinancing, and other fiscal levers. This experience should be comforting to municipal bond investors as the asset class served its primary purpose of principal preservation – largely without extraordinary federal intervention.

Given the nature of the crisis, federal stimulus actions have been unprecedented. The Federal Reserve’s balance sheet now amounts to over $8 trillion, and we are expected to run a federal budget deficit of over $3 trillion for the second year in a row.  This intervention from D.C. has generally impacted the municipal market in two ways:

  • For the healthiest issuers and those best prepared for the crisis, it strengthened their balance sheets and underlying revenue sources to a level where many credits are better situated today than they were before the crisis.
  • It has temporarily bridged the gap for credits that are either i) structurally imbalanced (those that have high fixed costs; e.g. pensions) or those that ii) experienced significant revenue shortfalls as a result of the pandemic (e.g. NYC public transit). For many of these types of issuers, the day of reckoning has simply been delayed and medium-to-long-term credit pressures remain.



Source: SIFMA

Today’s municipal market is awash in cash, experiencing high levels of demand, and low levels of supply. Sound familiar? Demand is further catalyzed by potential higher tax rates and a very strong credit environment (noted above). In terms of the latter, forty-six states are rated AA- or higher by S&P, while twenty-five are rated AA+ or AAA, which is equal to or better than what S&P rates the US government. If treasury debt continues to mount, an argument could be made for owning municipals vis-à-vis treasuries, as a way to enhance credit.

This technical and fundamental backdrop should lead to a stable market environment for the time being and low muni/treasury ratio levels (low tax-free municipal yields relative to treasury yields). We believe value can be added to portfolios in two major ways:

  • Buying kicker bonds (bonds with a short call date and longer maturity) with 3-4% coupons. Coupons above 4% will likely be called, while coupons lower than 3% are subject to higher durations (i.e. volatility).
  • Smaller-to-medium sized issuers which do not have broad market coverage nor placement within benchmark indexes. Adding these types of issuers are a way diversify away from the average benchmark and enhance yield.

Additionally, for tax-advantaged accounts, taxable municipal bonds offer value relative to other high-grade fixed income and are a way to enhance yield.



Quiescent market dynamics could give way for two reasons:

  1. Change in Monetary Policy: Later this year the Federal Reserve will likely embark on a path of tighter monetary policy and begin the process of unwinding current levels of extraordinary monetary policy support. The first step will be purely rhetorical – not actually doing anything – through the discussion of tapering balance sheet purchases. Currently the Fed buys $120 billion of treasuries and mortgage back securities each month. Tapering these purchases (likely starting with mortgage bonds) will reduce the size of monthly purchases. The actual balance sheet will continue to grow through 2022.
  2. Infrastructure Bill: The sausage making process is running at full speed in DC today. As part of an infrastructure oriented bill or as separate legislation, Congress may reintroduce Build American Bonds 2.0, similar to the program rolled out during the last crisis. This would directly impact the taxable municipal market, and likely lead to higher supply and higher yields/spreads. Additionally, Congress may allow for municipalities to “advance refund” their debt. This is a refinancing mechanism currently unavailable to issues as a result of the tax reform in 2017. If it is reenabled, this will likely increase tax-exempt municipal supply.

In summary, the municipal bond market remains on solid footing and proved its primary portfolio construction purpose during the travails of 2020. The outlook is favorable as well, though a change in monetary policy may provide opportunities to add exposure and higher yields on resulting market volatility.




[1] The American Recovery Plan was signed into law on March 11, 2021 and allocated $350 billion to state, local, and tribal governments.

Municipal bonds are known for their credit preservation characteristics (and certainly have proved their worth during today’s crisis), but another less known attribute of the asset class is their ability to mitigate duration.1 Duration is one of the primary measures of risk for a bond portfolio and certainly a focal point for today’s portfolio managers. According to our regression analysis, over the past 10 years (as of 12/31/2020), the correlation between tax-exempt municipals and taxable treasuries was high at roughly 88%, but municipals displayed lower volatility. Our regression analysis showed that for every 100 basis point (1.00%) increase in the 10-year treasury yield, the mean increase in the 10-year municipal yield was 0.82%.

Furthermore, municipal yields are less correlated relative to corporates which have displayed a 0.97% correlation over this 10-year period vis-à-vis treasuries. For every 100 basis point increase in the 10-year treasury yield, the 10-year corporate increased 0.94%.

One-year data for the analysis above is not included due to the unusual market dynamics of 2020 when correlations broke down. Municipals displayed a 35% correlation with treasuries last year due to the sharp but brief sell-off experienced in March. The correlation with treasuries soon returned in April and thereafter, as investor worries over credit calmed, and liquidity resumed for money market and mutual fund products. This proved to be, and we acted on, a great buying opportunity for SMA strategies.

Certainly, as the “risk-free-rate” (treasury yields) goes, as will municipals over the long term. But according to the data above the volatility is lower for municipals relative to both treasuries and corporates. Hence, municipals should play a role in investor’s high grade fixed income allocation as both a credit and durational hedge. Given the stable to improving credit backdrop for the market and the potential for higher individual and corporate tax rates, we believe municipal valuations are well supported. Furthermore, should supply remain muted, this provides an additional positive input for the market’s technical environment.

How to defend a bond portfolio in a rising rate environment

Given the above, we believe municipals should play a primary role for high income and high-net-worth investors in the current environment. Within the municipal sector, we believe there are three ways to mitigate a bond portfolio’s sensitivity to rising interest rates:

  1. Target higher – but not too high – coupon bonds: in the current environment we are targeting 3-4% coupon bonds. 5% couponed, “kicker bonds” are attractive as well, though the callability on these is high, so the yield-to-call must offer quite a spread. 3-4% coupon bonds will trade with lower volatility in a rising rate environment relative to a ~2% coupon bond.
  2. Ladder Structure – the ladder does two important things in relation to duration. It i) diversifies portfolios across the yield curve and ii) enables ongoing cash flow for reinvestment. Both qualities prevent over or underinvesting in particular areas of the ever-changing yield curve.
  3. Target non-benchmark issues – Bernardi Asset Management composite portfolios are centered on non-benchmark, smaller to medium-sized issuers. During volatile markets, like we experienced in March, retail fund flows tend to exacerbate performance of the large ETFs and mutual funds, which passively track the benchmark. These funds are forced to sell these benchmark names en masse, further exacerbating their performance and volatility. We believe that a Sharpe Ratio2 analysis demonstrates not only the greater return potential of allocating away from the benchmark, but also a lower portfolio volatility as well:

Source: Morningstar

The results above show that our Tactical Ladder and High Income strategy composites outperform the comparable benchmark from a risk adjusted perspective as defined by the Sharpe Ratio. Additionally, they should be considered in the overall asset allocation conversation as way to differentiate from passive strategies, reduce portfolio volatility, and add value over the long term for investor’s “mattress money” portfolio allocation.


Please contact your Investment Specialist for information about our Municipal Bond SMA strategies.



[1] Duration can be used interchangeably as both the weighted average time until repayment and as the percentage change in price of a bond based on the change in interest rates. The measurements are often nearly the same, but different conceptually. Both provide an indication of how sensitive a portfolio is to a change in market interest rates. The higher the duration, the higher sensitivity a portfolio will have to interest rate changes.

[2] Sharpe Ratio calculation: Return of portfolio minus Risk-free rate divided by the standard deviation of the portfolio.

[3] Standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates that the values tend to be close to the mean of the set, while a high standard deviation indicates that the values are spread out over a wider range.

Apparent Risk in Municipal Bond Land

In December 2019 we released Unapparent Risk in Municipal Bond Land which recapped a solid year of performance and warned investors of the underlying risks within the municipal market.

We did not expect those risks to come to fruition so quickly, but they certainly became apparent three months later last March. We are gratified in many instances that our positioning of clients’ portfolios provided safeguards against the risks we highlighted, and, in many cases, our portfolio management strategy allowed us to take advantage of market dislocation to the great benefit of portfolios. As we view the market at the end of 2020 we are wondering if it has a similar shape and feel and presents news risks for municipal bond investors due to the impact of the COVID-19 health and economic crisis.

Two of the risks we discussed (i. investment vehicle and ii. “yield hunting”) came to fruition in March when significant dislocation and underperformance occurred in the mutual fund/ETF and lower-grade municipal sectors. We believe significant risk continues to exist in these areas because COVID has exacerbated the conditions of many fiscally mismanaged municipalities and we strongly feel “mattress-money” holdings should avoid these credits. Allocating capital to issuers that are well managed, essential purpose and/or essential revenue bonds – in a separate account portfolio – is the best way to preserve and grow your mattress-money allocation.

2020 has reminded us of many things and certainly these lessons are a silver-lining in a challenging year. Within municipal bond-land we are reminded that, once again, our targeted municipal sectors stand the test of time and hold up during volatile and rough economic climates.

As at the end of 2019, investors are faced with a low-rate environment.  So, while the temptation to take on risk through a higher allocation to sub-par credits, high duration securities (long maturities), leveraged assets, or alternative municipal investment vehicles is understandable – it should be avoided.

A Year in Review

In 2020 the market was certainly tested in both price and credit. In terms of price, at the end of 2019 we asked: “What will the bid market look like…when a large number of funds need to sell similar holdings simultaneously? Will these investment vehicles offer good liquidity and avoid fire sale price selling in this possible scenario?”1


In March, many fund investors received the promised “liquidity” – BUT AT FIRE SALE PRICES. In at least one case, the parent company of a large mutual fund provider was forced to  step in and provide liquidity (use its own capital) to its underlying mutual funds. This event underscores that liquidity is a two-parted measurement. The ability to click a “sell” button and dispose of your shares is a form of “instant” liquidity, but at what price are the shares sold? A fund does not necessarily give you this transparency, nor protect you from selling at an unreasonable price/yield/valuation – unlike a well-managed SMA strategy.

If you or other investors seek liquidity from a mutually owned investment vehicle, that fund must inevitably sell a portion of the underlying holdings. So, on the front end you have a “stock-like” sale that the retail investor experiences, but on the backend the actual value you realize is handled similarly to how any municipal bond is traditionally sold. This disconnect between the investors’ “liquid” sale experience and the ultimate sale of the asset, was exacerbated in March when the front-end retail investor selling outpaced the back-end ability to disburse assets and raise cash from fund providers.

March may have been unique in its scale, but this type of market displacement is not uncommon. We have experienced significant price dislocations every 3-4 years…

Mutual fund/ETF assets have grown significantly, while the number of firms on the bid-side/back-end (broker-dealers and market makers) has shrunk. This factor contributed greatly to the sell-off last March – the most significant of the past twenty years – and is likely it to occur again. There simply was not enough dry powder to take on the waterfall of fund selling.

In mid-to-late March the iShares National Muni Bond ETF2 (chart to the right, ticker: MUB) traded at a significant discount, and then premium, to the value of the underlying holdings. This means, as a seller of the fund in mid-March you were selling the ETF at a discount to where the actual underlying holdings were trading in the municipal marketplace. At one point this discount was 5.76%. Again, liquidity was realized through the instant sale on one’s computer screen…but at what price to the investor?

In times of such market stress, an SMA is not forced into selling and if portfolio liquidity (cash, short maturities) is available, can take advantage of these market dynamics. Additionally, as a liquidity provider, we strive to avoid clients selling bonds at irrational levels, thereby delivering value when liquidity is needed.

March may have been unique in its scale, but this type of market displacement is not uncommon. In recent times the market has experienced significant price dislocations every 3-4 years including 2008-2009 (Great Financial Crisis, GFC), 2010 (Meredith Whitney), 2013 (Taper Tantrum), and 2016 (Presidential Election). We believe the average client portfolio at Bernardi remains on guard and well-positioned to take advantage of similar environments in the future – which we welcome to opportunistically take advantage of for client portfolios.

Source: Bloomberg 

Whereas the selloffs in 2013 and 2016 were not underpinned by credit concerns, March’s sell-off was induced in large part by an underlying concern about the credit health of the average municipality. This was very much like 2008-2009 when investors feared a severe economic contraction would blow insurmountable holes in municipal balance sheets.

To date, the COVID-19 induced economic crisis has played out on a national scale similarly to how a natural disaster impacts a local economy. During such disasters, areas experience an acute economic contradiction, followed by a sharp recovery. Importantly, Moody’s has noted that natural disasters have not been the cause of a single default in the history of the municipal bond market.3 2020 has played out similarly for your average municipal credit.

Though particular sectors (restaurants, hospitality, airports, and nursing homes) continue to face the acute phase of this crisis, the underlying sources of revenue for many municipalities (property, income, sales tax) have not been severely hampered compared to 2019. In many cases, spending has been reallocated between sectors, maintaining overall stability for municipal sales tax revenue. Furthermore, most issuers have various fiscal levers to pull and revenue raising abilities (i.e. raise taxes) when faced with projected revenue shortfalls.  Lastly, our portfolios favor suburban and rural issues, which have benefited through increased demand for housing (high property prices = more property tax revenue) at the expense of city-dwellings.


2021 Outlook: General Stability but Headline Risk Remains

Though 2020 ended calmly for the municipal market, COVID-19 is still with us and its economic scars will linger for some time. The underlying economy has been significantly assisted by both fiscal and monetary policy stimulus, which will likely have less of an impact in 2021. Additionally, the elevated unemployment rate will dampen consumer spending and economic growth.

Given the low-rate environment and early innings of an economic recovery, we believe now is a time to practice patience and not increase risk through buying lower rated issuers/sectors or significantly increase duration. Should the current rate environment continue into the spring and if you are seeking a portfolio strategy offering higher income, we encourage investors and their advisor to look into our High Income Strategy to enhance the underlying yield of their portfolio without sacrificing credit quality.

Apparent Risk in 2021

Risk 1: Sacrificing credit quality for an increase in portfolio yield is one of the main risks we see for 2021. Generally, there are two ways to increase yield by investing in issuers with lower levels of credit health:

  • Invest in bonds that have economically sensitive and/or concentrated underlying sources of revenue.
  • Invest in geographies (states/cities/etc.) faced with structurally imbalanced budgets and poor underlying economic conditions (low growth and/or high taxes). Typically, the biggest overhang for these types of issuers are pension obligations and either an inability or unwillingness to reform and contribute higher levels of funds to close the liability shortfall. If investment returns do not match the projected rates of return, this pension liabilities will put further pressure on such issuers and their fixed costs.

At this time, we do not think either type of these higher risk sectors are suitable for the mattress-money allocation of your net worth, nor is prudent given the current economic climate.

We continue to find value in smaller and medium-sized, ex-metropolitan credits that are too small to be owned by the aforementioned large mutual fund providers. And which are backed by or used for essential services.  

Risk 2:
Certain issuers and sectors remain in desperate condition and are reliant on atypical – and likely temporary – sources of revenue or financing. The recently signed COVID relief and funding bill allocates funds to Chicago Public Schools (CPS) and over $4 billion to New York City’s MTA, while the same agency has already maxed out its allowed financing from the Fed’s Municipal Lending Facility (MLF) and is projected to run significant deficits in the coming years. The State of Illinois has tapped the MLF as well, while the State of New Jersey strongly considered the facility before going to the public markets.

These sources of funding and financing are not a panacea for structurally imbalanced issuers nor comforting for debtholders knowing that one’s security is underpinned by extraordinary Federal intervention.

In the coming years, unless these types of issuers make significant reforms or budget/service cuts, which may be politically unpalatable at the local level, we fear a failure to obtain Federal dollars to bridge their funding gaps can cause not only a cash squeeze to those credits but also “headline risk” in the market generally, thereby unsettling prices.

The types of credits mentioned above are not illustrative of the market as a whole, and any market weakness resulting from their inability to secure extraordinary federal support should be looked at as a buying opportunity for your average credit.

We continue to find value in smaller and medium-sized, ex-metropolitan credits that are too small to be owned by the aforementioned large mutual fund providers. And which are backed by or used for essential services. These types of bonds are a great way to i) add spread (relatively higher yields) and ii) diversify holdings away from large mutual fund providers.

We think patience is warranted in 2021 as the economy heals and rates begin to normalize. Should the recovery move faster than the market or Fed anticipates and if inflations picks up, our traditional ladder strategy will be able to take advantage of the rate reset. That said, we do not think it is appropriate in this environment to reach for yield by targeting low-grade, lower credit issuers.

Please call your Investment Specialist if you have any questions and would like to review portfolio holdings.



Matt Bernardi
Vice President
January 5th, 2021



  1. Bernardi Securities Unapparent Risk in Municipal Bond Land, December 30th, 2019
  2. Source: Bloomberg “NAV” page
  3. Moody’s US Municipal Bond Defaults and Recoveries, 1970-2019

Taxable municipal bonds (taxable at the federal – and oftentimes state – income level) have historically lacked investors’ attention due to limited supply and presence in a market dominated by investors seeking non-taxable income. Supply has skyrocketed in recent years due to aspects of the 2017 tax reform bill, low nominal interest rates and a flat yield curve. Therefore, taxable municipals are more readily available, and they also offer attractive relative and risk-adjusted returns compared to other high-grade fixed income.



                                       Source: SIFMA U.S. Municipal Bond Issuance                                                                             Source: Bloomberg December 8th, 2020

As demonstrated above by the chart on the right, AAA rated taxable municipals (Bloomberg benchmark index) yield the same or more than the AA rated corporates (Bloomberg benchmark index), even though historical default rates are significantly lower. Equal or higher municipal yields are a result of a lack of direct Fed intervention in the municipal market, illiquidity premium, and general idiosyncrasies of the municipal market (e.g. many more CUSIPs/issuers relative to corporates). We think this dynamic is worth taking advantage of for retirement portfolios (i.e. IRA accounts) and certain investors with a federal income tax bracket below 30%.

2021 is poised to break this year’s record of taxable municipal issuance, but there are threats to future supply. For one, the bulk of the recent issuance is used for refinancing purposes due to the low rate environment. Should rates increase the ability to refinance will become more difficult likely reducing the new issue taxable supply. Additionally, if aspects of the 2017 tax reform are revoked, the supply of taxable municipals may decrease.


High-grade fixed income portfolio construction

Investor portfolios need to take a dynamic approach when considering taxable fixed income options. In most cases, taxable municipal bonds present the most attractive opportunity across the yield curve from a risk-adjusted or outright yield standpoint. However, corporates, U.S. agency securities, certificates of deposit, or treasuries may be more attractive in certain areas of the yield curve depending on market dynamics.

Based on today’s market dynamics taxable municipal bonds are an attractive opportunity for many investors.



Please contact your Investment Specialist for information about our Taxable Municipal Bond SMA strategies.


September 28, 2020

In Part III of our municipal credit commentary pertaining to the health and economic crisis brought on by COVID-19 we overview the most recent data available pertaining to state revenue surveys and data from municipalities within the State of Illinois. Thus far, the data indicates that some of the most dire revenue projections resulting from the pandemic lockdowns have not come to fruition as the resumption of economic activity has been stronger than expected.

That said, the impact of the pandemic has been broadly negative. We remain cautious on the outlook for the sector and as a result are targeting high quality, essential purpose, general obligation or essential revenue issues. We believe there remains downside risk in the most vulnerable sectors and the yield compensation for this additional risk is insufficient.


The full extent of revenue shortfalls at the state and local level as a result of the ongoing economic and health crisis will not be known for some time and will surely pressure both revenues and expenditures for years to come. In the early innings of the crisis some projections for the hit to state revenues were dire. The Center on Budget and Policy Priorities, for example, estimated revenue declines of up to 31% compared to pre-COVID projections.[1] The Federal Reserve Bank of Boston noted in July that the tax revenue for certain states could decline greater than 20% to 30%.[2]

However, recent J.P. Morgan analysis significantly contradicts the aforementioned “sky is falling” headline-grabbing projections. They found that that overall YTD tax revenue collections through July have been strong, and most states are only witnessing modest revenue declines of ~4-5%.[3]

Though revenue declines were significant during the depths of the social shut-ins, the recovery in economic activity since reopening has been robust. J.P. Morgan noted that all the states analyzed (19) recorded double digit revenue declines in April, but in July experienced an average 63% increase in income tax collections year-over-year. The State of Ohio in its recent monthly financial report noted August tax receipts were robust and that “Nonauto sales tax, auto sales tax, and personal income tax exceeded estimates by percentages ranging from three percent to ten percent.”[4] Interestingly, it noted the dynamic nature of sales taxes: following the 2Q decline, the economic climate and pandemic realities have caused “shifts in consumption away from services and toward goods.”

Information that we track for Illinois’ local government sales, income and use tax collections distributed to local governments seem to support some of the conclusions arrived at by J.P Morgan and the State of Ohio, as well. Sales tax collection data is available up to and including sales made in June 2020 – declines began in March with 17% lower collections in that month versus the same month in 2019. Declines of 30% and 23% followed in April and May. The data for June provides a less clear comparison given an apparent reporting discrepancy but still indicates that taxes may have increased as much at 13% versus the prior period. For the rolling 12-month period as of June 2020 then, sales taxes were down around 3% with significant variability at the local level (note too that this data isn’t wholly comparable to the state as it includes variations due to local sales taxes enacted by municipalities, not just a state wide tax).

Income taxes were down 50% in April versus April 2019, virtually breakeven in May and June then more than doubled the 2019 period in July before recording a 29% increase in August – on a rolling 12-month basis this amounted to 2-3% increase as of August 2020 (compared to a 6-7% decline if the endpoint was April 2020). Finally and interestingly, use taxes[5] in Illinois appear to have benefitted from internet sales and did not report a year-over-year decline on a monthly basis over the last six months, with the rolling 12-month total up 20% as of June 2020. As the state of Illinois is more reliant on income taxes than sales taxes, these results so far appear generally favorable although likely caused liquidity pressure due to the significant swings in income tax collections. At the local level, distributions of sales taxes (rolling 12-month total of approximately $4.12 billion) far outweigh income tax (approximately $1.38 billion) or use tax (approximately $387 million) distributions.


Thus it seems that more volatile sources of operating revenue for many credits issuing general obligation bonds have performed better than anticipated, though impacts still appear to be broadly negative with the possibility of lingering cumulative impact depending on the trajectory of the pandemic.

As of now, many issuers have reacted to the revenue uncertainty by reducing discretionary operating expenses (such as travel, certain fringe benefits, training, etc.) and postponing capital spending where possible. Some have frozen or even reduced headcount. The Bureau of Labor Statistics data indicated state government employment as of August 2020 compared to February 2020 is down 4% while local government employment is down 6% – nearly 1 million jobs in total. Although these percentages are actually below many private sectors of the economy over the same period, it is important to note that the percentage increase in total private employment from July 2008 to February 2020 was 12-13% whereas state and local government increased less than 0.5%, respectively over the same time period.

Source: U.S. Bureau of Labor Statistics 

Although federal aid has certainly benefitted issuers in dealing with direct costs of the pandemic (in particular for sectors such as airports, mass transit and universities), most of the municipal sector has not seen much, if any, direct federal aid to counteract tax revenue losses (though there has been indirect support, such as increased unemployment benefit payments and the Paycheck Protection Program). Proposals for additional federal aid that in part specifically address such government revenue shortfalls have been mired in partisan disagreements about the size and scope of any stimulus plan with attempts at a compromise still ongoing.[6]  

As we noted in our Market Review, the market’s perceived timetable for another round of stimulus was far too optimistic and additional aid to municipalities may not come until after the election. Although state and, in particular, local governments largely avoided assuming the receipt of such federal aid in their budgets, those that did—such as the state of Illinois[7] – are experiencing additional budgetary pressure.

These data points indicate that while revenue sources for many issuers of general obligation and essential service revenue bonds have been negatively impacted, they still performed better than initially anticipated over the last few months of the pandemic. It is important to recognize there is significant variation at the local level and we expect this to continue. Lastly, certain municipal sectors carry significant operational and credit risk even beyond the challenges to most general obligation and essential service bond issuers:

  • Health care; in particular, nursing and retirement care
  • Mass Transit and airport revenue; in particular, credits unsupported by tax revenue or supported by narrow sources of tax revenue (the Metropolitan Transportation Authority in New York City remains on negative outlook. S&P has downgraded several airport credits over the last month while maintaining a negative outlook on most)
  • Narrowly focused, dedicated tax bonds (e.g., hotel/motel taxes, food & beverage or restaurant sales taxes)
  • Higher education; in particular, credits with a more narrow revenue pledge limited to auxiliary revenues (housing & dining services, parking revenues or even student fees). As well as regional state universities and private universities without solid national brand recognition

These types of credits remain more exposed to either elevated costs or sudden declines in revenue (or both) as a result of the pandemic. It remains to be seen, for instance, the ultimate operational impact from the pandemic on universities. Many have invited students to return to campus while many others have discouraged or forbidden students to return for the fall semester. These decisions, of course, have affected systems’ revenues collections and there is no clear solution in sight. Given universities’ ability to shift many classes online, the negative impact is ameliorated somewhat, but this approach may fail in the end if students tire of it. However, even if students remain on campus, with outbreaks remaining a persistent issue, collection of auxiliary revenue and student fees could be negatively impacted – for instance universities in Utah announced fee waivers[8] coming into the 2020-2021 year.

There remains a possibility of a resurgence of COVID-19 in the fall to early winter similar to what many states experienced during late June and July. Additional longer-term pressure could arise depending on the efficacy of a vaccine in terms of not only initial immunity but the durability of immunity from COVID-19[9]. The less effective and durable a vaccine, the larger and more extended the negative impact on these highlighted sectors and indeed, the broader economy and municipal landscape.

Considering this, it appears downside risk remains in the municipal market and in particular, the most vulnerable sectors including health care, transportation, higher education and certain dedicated tax bonds. However, the general obligation and essential service revenue sectors of the market appear to be better positioned to weather this continued pandemic as they have done over the past several months. In particular, we continue to focus on issuers with broad tax or service bases that are better positioned to avoid social unrest and environmental stress (both of which compound the already daunting challenge of the pandemic) as well as areas less reliant on tourism and operating revenue streams less reliant on volatile types of taxes.



Brian Shea
Director of Municipal Credit

Matt Bernardi
Vice President, Investment Specialist





[3] JPMorgan Municipal Morning Intelligence, September 2nd, 2020


[5] According to the Illinois Department of Revenue, “Sales tax is a combination of ‘occupation’ taxes that are imposed on sellers’ receipts and ‘use’ taxes that are imposed on amounts paid by purchasers.” Refer to,,

[6] Refer to recent news articles, though this situation remains fluid:



[9] Refer to and for commentary on the COVID-19 pandemic from a public health perspective

In March 2020, the COVID-19 crisis caused dislocations across world financial markets. The municipal market was not sheltered from this chaos. At the end of February, tax-free yields were sub-1% out to 11-year maturities. In mid-March, municipal bond prices plummeted, and index yields increased daily by 40-50 basis points. From March 11th to March 20th, the 10-year AA-rated municipal benchmark yield rose from 1.32% to 2.92%.

Mutual funds and exchange traded funds (ETF’s) were the cause behind the sell-off. Funds were significant net sellers during this period due to investor redemptions. These funds were forced to sell their underlying holdings in order to meet redemptions at irrationally low prices/high yields. ETF NAV values also plummeted, adding to downward pressure on bond prices. Bond fund and ETF products were caught in a liquidity trap – supply hugely outweighed demand – heightening the trading mismatch between the investment vehicles and their underlying assets. Investors in these vehicles realized significant losses during this period.

The selloff was also exacerbated by two market dynamics occurring within fund and ETF products that had been developing since the previous crisis, consequences of the low rate environment. Many tax-free fund and ETF products increased their exposure to lower quality municipal credits in order to increase portfolio yield. These types of credits are much more sensitive to the ongoing economic crisis compared to public purpose municipal general obligation (GO) or essential purpose revenue issues. Secondly, many fund and ETF products had increased their interest rate risk by increasing duration to conform to industry benchmarks.

In contrast, the separately managed account (SMA) structure proved its worth again. Our Bernardi Asset Management (BAM) tax-exempt strategies outperformed. Our SMA clients were not forced sellers and BAM’s strategy of allocating to high grade GO and essential purpose revenue bonds were two of the primary reasons. Ultimately, the SMA structure allows for greater control over portfolio activity and avoiding being caught up in the “herd” of market activity. Our BAM strategy returns below reflect this dynamic.

Below are returns of two BAM tax-free strategies compared to some of the larger mutual fund/ETF comparable alternatives. BAM’s High Income Municipal strategy received PSN’s Top Guns award for having one of the top ten returns for the quarter in its respective category.

Municipal Strategy/Product 1 Month YTD 1 Year
BAM Tactical Ladder -0.02% 0.61% 3.37%
VWIUX -1.40% -2.49% -0.56%
MUNI -1.07% -2.21% -0.35%
TFI -0.64% -1.78% 0.42%
BAM High Income -0.58% 0.33% 3.89%
VWLUX -2.21% -3.45% -1.46%
MUB -1.58% -2.35% -0.28%
ITM -2.29% -4.44% -1.86%

*Source: Bloomberg. Based on share price return. No dividend reinvestment. Returns as of 4/30/2020




The effects of COVID-19 on the nation are far different than prior natural disasters in the recent history of the United States and continue to evolve with each day. We are still learning and reacting. The national impact is significant as evidenced by presidential approval of all fifty states’ declarations of emergency. Presently, the pandemic is affecting regions of the United States to different degrees. This calls for more nuanced and tailored responses than those employed in past calamities. We believe this approach applies to municipal credit analysis, as well (more on this later).

Past natural disasters caused severe infrastructure damage, relatively limited death tolls, and a fairly quick resumption of economic activity. This pandemic is different. Infrastructure is mostly unaffected while many people are unable to work with no definitive timeline on when they might safely return. Thus, while the immediate economic impact of the pandemic is similar to past disasters, the breadth and the uncertainty of its length make this one markedly different.

Additionally, the upward trajectory of any subsequent economic recovery may be much more uneven, halting and drawn out, particularly if the disease periodically resurfaces in the future after social distancing measures are relaxed. Thus – we wonder – if the pandemic and attendant economic effects may not be a single “blizzard” that only needs to be ridden out for a month or two but a “winter”  that, absent a medical breakthrough, could persist to varying degrees until a safe and effective vaccine can be introduced to the population. Hopefully, the medical infrastructure and planning is now in place to manage any subsequent “storms” of new cases, while allowing the economy to return to some semblance of its prior state.

Clearly, certain revenues states and local governments rely on have been immediately impacted: sales taxes, permit and license revenues to name a few. Moreover, states and local governments will also have to navigate collection delays—and potentially eventual declines—of other tax revenues. For instance, states with income taxes have generally followed the federal government and delayed their filing deadlines to July 15th. The delay will impact near term collections particularly since the month of April historically records larger than average receipts of income taxes. Moreover, in states with progressive income tax structures coupled with a concentration of high net worth individuals —such as California, New York and New Jersey—the elevated reliance on top earners can cause severe revenue declines during economic downturns.

“…our focus remains on our Three Pillars of Credit Analysis: deal purpose, deal structure and the underlying credit quality of the issuer”

Many states, counties and municipal entities have also enacted temporary moratoriums on late payment penalties of property taxes as well as on penalties or shutoffs that water, sewer and electric utilities may enact for late payment of their monthly bills. Delays from a significant number of payers can strain liquidity.

Actions undertaken by the federal government in terms of direct stimulus payments will assist states and certain hard-hit areas; however, much of the currently enacted support is aimed at reimbursement for items such as healthcare costs or unemployment benefits rather than supplementing potential revenue losses. Importantly, a recently enacted Federal Reserve program will enable the Federal Reserve Bank to extend short-term loans of up to 24 months to state and local governments in the form tax and revenue anticipation notes to address delayed and reduced tax revenue. Currently, direct participation in the “Main Street Lending Facilities” program is limited to states, counties[1] with over 2 million in population and cities[2] with over 1 million in population. Less than 30 local governments nationally qualify given these restrictions.  In our view, these arbitrary population thresholds are far too limiting leaving tens of thousands of local governments unable to access the program.

We have been actively urging the Fed to open the program to a wider group of local governments and are hopeful it will do so. The program has the potential to benefit a much wider range of deserving issuers and should be adjusted to accomplish this end goal. Moreover, the interest cost to the issuer remains undefined and access to the program may not be available for weeks. As a result, certain states have accessed the private market, choosing not to wait for the Federal Reserve. For instance, the state of Hawaii disclosed that on April 4th it had issued $600 million in taxable general obligation bond anticipation notes.

The dramatic impact of the pandemic and the attendant uncertainty places us in one of the most unique and challenging environments to implement our internal municipal credit analysis process. In light of impending revenue shortfalls, the underlying credit quality of a municipality entering the crisis and management’s ability and willingness to reduce certain expenses takes on significant importance. While continued federal government intervention will help alleviate the strains on state and local governments, our focus remains on our Three Pillars of Credit Analysis: deal purpose, deal structure and the underlying credit quality of the issuer (refer to “Process and Strategy” on our website for additional details).

A recently priced deal for the General Obligation Bonds (Alternate Revenue Source), Series 2020 of the city of LeRoy, Illinois exemplifies this process.

  • PURPOSE– The Series 2020 bond proceeds are for needed capital projects for the city’s water and sewer systems, an essential service.
  • UNDERLYING CREDIT QUALITY– The city’s reserves had been drawn down over the past few years, yet current levels provide a measure of flexibility to absorb increased costs or revenue declines. Management has taken steps to formulate a lean budget for the upcoming fiscal year ending 4/30/2021 and delayed final budget adoption until the end of April to better assess the impact of the pandemic and make any needed adjustments. Lastly, based on fiscal year 4/30/2019 performance, the city’s combined water and sewer systems covered debt service from operations with notable cash reserves within each system.
  • STRUCTURE– Several different taxes and utility revenues are pledged to the Series 2020 bonds including net revenues of the water and sewer systems. The bonds are also secured by an unlimited property tax general obligation pledge and levy. Finally, the Series 2020 Bonds are also insured by Assured Guaranty Municipal and interest on bonds is capitalized from bond proceeds through December 1, 2022.

In this challenging environment, we remain focused on our core sectors of general obligation and essential service utility revenue bonds.  Importantly we are making adjustments to our process of assessing credit quality within these sectors recognizing the unique credit strains due to the economic upheaval caused by the COVID-19 pandemic.

While the road forward remains challenging for state and local governments, and indeed almost any municipal issuer, there is a substantial degree of variance among issuers as to their ability to navigate this environment. Our commitment remains – rely on our credit analysis process to identify those best positioned to do so.

Thank you for continued confidence in our team. We will have additional commentaries on this topic in the coming weeks.



Brian Shea
Director of Municipal Credit

April 20, 2020



[1] Based US Census Bureau July 1, 2018 estimates, the eligible participants would include the counties of Los Angeles CA, Cook IL, Harris TX, Maricopa AZ, San Diego CA, Orange CA, Miami-Dade FL, Dallas TX, Riverside CA, King WA, Clark NV, San Bernardino CA and Tarrant TX. Kings County and Queens County would also be eligible by population but functionally are part of New York City as the boroughs of Brooklyn and Queens.

[2] Based US Census Bureau July 1, 2018 estimates, the eligible participants would include the cities of New York City NY, Los Angeles CA, Chicago IL, Houston TX, Phoenix AZ, Philadelphia PA, San Antonio TX, San Diego CA, Dallas TX and San Jose CA.

I hope you and your families are well. I hope everyone is safe. The current state of affairs all of us face is fluid, so I want to provide you with periodic updates. Thankfully to date, the entire Bernardi Securities team remains healthy, safe, and engaged in our commitments to our clients and enterprise.

As I wrote to you on March 23rd, our firm remains fully operational.  Our day-to-day operations are orderly as we serve our clients. We are accomplishing this through a combined system of remote access operations and lightly staffed crews at the Chicago headquarter office and downstate Peru and O’Fallon branches. Our business continuity plan has worked very well to date. It continues to evolve given the fluidity of this crisis.

Our goal is twofold: 1) help safeguard the health of our valued employees and 2) continue to serve our clients at a very high level despite unprecedented operational challenges.

We continue to provide these essential services:

  • Bond Portfolio Management Expertise for Investors
  • Market Liquidity for Investors and Issuers across the Country
  • Access to Municipal Bond Investment Capital for Municipalities, School Districts, Counties, Water/Sewer Utilities, Park and Library Districts, Hospital, College and University Systems

Over the years I’ve often written: “Municipal Bonds Build America” and we are doing our very best to help ensure an orderly, functioning market.

An orderly and functioning capital market is needed to help formulate an effective response to the COVID-19 crisis. Enacting effective safety and health solutions becomes even more difficult if investment capital flow slows, becomes prohibitively expensive, or ceases.

We will continue to play our part by supporting our clients and colleagues who have relied on us for nearly 40 years. So, rest assured: we will continue to “Keep Calm and Carry-On”…though 6-feet away from one another.

Below is our current Market Commentary.  Please call or email us if you care to discuss its content or any other topic. I thank you very much for your continued confidence in our team.


Ronald P. Bernardi
President and CEO


“I couldn’t do that. Could you do that? How can they do that? Who are those guys?” -Sundance Kid to Butch Cassidy in “Butch Cassidy and the Sundance Kid”, 1969


Befuddlement and confusion are understandable human reactions when a situation changes rapidly and profoundly. When normally effective counter measures prove meaningless, add anxiety to the mix.

Like Butch and Sundance, many bond market participants experienced similar feelings last month.  Investors, issuers, portfolio managers, traders and regulatory authorities found themselves asking at some point: “What just happened?”

Here’s a brief recap to provide some context:

On March 9th a nationally recognized index of municipal bonds (Municipal Market Data or MMD) at day’s end yielded 0.57%, 0.91% and 1.38% for AA rated 5, 10, and 20-year bonds, respectively.

On March 10th, the seemingly endless bond yield decline reversed itself a bit as the same indices yielded 0.69%, 1.04% and 1.54%.

This upward trend of bond yields continued and accelerated over the next eight trading days. (Reminder, as bond yields increase, prices decline.)

DATE 5-year 10-year 20-year
3/11 0.93% 1.32% 1.82%
3/12 1.28% 1.74% 2.32%
3/18 1.64% 1.97% 2.47%
3/19 2.14% 2.47% 2.97%
3/20 2.64% 2.92% 3.37%

For a period of four days municipal bond prices plummeted and indices yields increased daily, 40-50 basis points. Across the maturity spectrum the yield ratio of municipal bonds versus U.S. Treasury yields moved far above historical norms as sellers across most markets sold bond holdings at deep discounts.


It was as if the ghost of Henry Kaufman – “Dr. Doom” himself – along with a panoply of 1980’s Bond Market Vigilante cohorts had simultaneously pushed the “SELL” button on their electronic trading platform devices!

It was a spectacle rarely seen in the “boring bond world.” And it happened quickly.

For many sellers it was unadulterated bond market carnage. For all buyers it was an opportunity they may not see for some time.

As quickly as the price sell-off began, it reversed in powerful fashion once the panic subsided and lawmakers authorized the Fed to assist state and local governments’ finances and price support its debt.

DATE 5-year 10-year 20-year
3/24 2.41% 2.72% 3.17%
3/25 1.76% 2.07% 2.52%
3/26 1.23% 1.47% 1.92%
3/27 1.17% 1.39% 1.84%

Sizable paper losses that existed in investors’ portfolios and market makers’ inventories on March 23rd disappeared in a matter of days!

I used to think if there was reincarnation, I wanted to come back as the President or…a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody”. -James Carville, Wall Street Journal February 25, 1993

For most of the last 10 years the bond market has hardly been intimidating. There have been brief periods of time over these years where markets were dicey, but they were few and short lived.

The mostly bullish, tedious, and predictable bond market of the last decade changed dramatically in March.

We’ve studied trading activity during the volatile market period last month to help us better understand what might have contributed to the severe fluctuation in prices. Below is market trading data as provided by the Municipal Securities Rulemaking Board (MSRB) drawn from three reports. The Tables show daily trade activity as follows: Table A. “Customer Purchases”, Table B. “Customer Sales”, Table C. nets the ‘Purchases” and “Sales” activity.


Table A:

Table B:

Table C:

Trading par value volume “Sales” activity spiked upward beginning March 13 and remained elevated until month end. This put intense downward pressure on bond prices. Table C. shows multiple days during this period when sales outpaced purchases even though purchases were quite elevated above the norm (March 20, 23, 24). Note the heightened level of trading volume by par value of large block sizes ($1,000,000+ and $5,000,000+) on these days. This activity corresponds with the sharp uptick in yields. This is evidence large institutional market makers and investors were net sellers putting significant downward pressure on prices pushing yields up much higher. This trading pattern does not occur in a normalized market dynamic.

Not coincidentally, investors pulled a record $12.2 billion out of municipal bond mutual funds in the week ended Wednesday March 18th.  This was a continuation of the prior weeks’ negative flow trend which persisted daily until March 26th. For the most part, our clients’ Separately Managed Account (SMA) portfolios held up very well. Most portfolios reacted as we expected.

Forced selling by bond funds and portfolio managers, massive liquidations of ETFs and other bond-like products does not create realized losses if an SMA portfolio investor avoids selling.

Of course, SMA portfolio values on Friday March 23 were much lower than 7 days prior. But those lower valuations reversed themselves quickly, snapping back in subsequent days.

And for SMA managers and investors that exercised good judgement (and a bit of intestinal fortitude) and bought during this period – it was the bond market’s equivalent of the ultimate close-out sale.

Conversely, most investors in derivative (often complex in nature) type bond products:  bond funds, bond ETFs, variable rate demand notes, tender option bond trusts realized significant losses during this period – even if they chose not to sell their shares when NAV values plummeted.

Here’s the rub with these derivative bond products: There’s often a fundamental disconnect between liquidity of the aforementioned bond derivative product shares and the underlying value of the investments they hold: it’s easier for investors to sell the fund shares than the underlying bond assets determining the share price. This is not a critique, but a statement of fact. This becomes hugely relevant when selling activity far outpaces buying activity as it did last month.

This disconnect is multiplied in times of extreme liquidity driven markets – when NAV prices plummet many investors realize losses whether they sell or not.

In a rapid-fire market sell-off the liquidity mismatch feature inherent in bond funds, ETF’S and other derivative fixed income products is the bond market’s metaphorical desert mirage. The efficiency and cost-effective premise promogulated by many of them is seriously challenged.


Bond market investing entails multiple risks: credit, interest rate and liquidity to name the big three.  A successful strategy is designed around mitigating these elements.

Our bond portfolio management is conducted on a Separately Managed Account (SMA) platform only with transaction or fee-based options. Portfolios are laddered over a time period suited to the client’s needs and comfort level.  The SMA structure allows for greater control over portfolio activity. We believe it is a more efficient and cost-effective method for high-net-worth investors to be active in the municipal marketplace. The events of the past few weeks confirm, once again, that belief.

Bernardi’s management strategy is based on a disciplined municipal credit analysis process developed over the past 50 years. It enables us to identify undervalued credits and identify issues with developing financial issues.

The core of our evaluation framework revolves around our “Three Pillars” of credit analysis: Deal Purpose, Deal Structure, Underlying Credit Quality.

Solid credit quality investing within a laddered SMA portfolio structure is a conservative (some say “boring”) and time-tested approach for income-oriented investors to participate in the bond market.

Simplicity has a place in investment portfolios – for some this is critically important in tumultuous times like the present. Perhaps the market volatility is behind us. No one knows with any certainty.  But surely there will be more news and events related to COVID-19 confronting us which likely will roil markets.

Volatility can be gut-wrenching, and it provides for opportunistic investing. Municipal bond yields remain elevated and continue to offer attractive value in our view. If your “mattress money” fixed income investment allocation has dropped below an appropriate percentage level for your situation, we suggest you call us or your investment counsel to discuss the issue.

Thank you for your continued confidence in our entire team. Please call or email us to discuss issues important to you.



Ronald P. Bernardi
President and CEO