Baird's Newest Municipal Bond Funds Post 5-Year Returns
Baird Strategic Municipal Bond Fund (BSNIX) and Baird Municipal Bond Fund (BMQIX), recently celebrated their five-year anniversaries with strong results. The funds, which both received a 5-star Morningstar Rating™ as of November 30, 2024, are managed by a team led by Duane McAllister, CFA, and Lyle Fitterer, CFA, and include Erik Schleicher, CFA, Joseph Czechowicz, CFA, and Gabe Diederich, CFA.
Recently, the team shared insights on the outlook for the coming year:
Does the 2024 election have implications for municipal markets?
Yes, it is likely to have many implications on the broader bond market, not just municipals, but we are unlikely to know the full impact for a few months. Post-election, Treasury yields rose as investors anticipate the Trump administration’s policies may lead to a faster pace of growth with stickier inflation. Interestingly, tax exempt yields have declined modestly since the election. This may be a temporary phenomenon as supply should pick up in the municipal market prior to year end and as investors begin to look more closely President-elect Trump’s tax policy indications. We believe there is a low probability that the municipal market will undergo significant changes under Trump. Any serious discussion about elimination of the tax-exempt benefit, were it to cause municipal yields to rise relative to Treasuries, would likely be viewed as a buying opportunity for long-term investors.
How does the outlook for Fed rate cuts affect your management of these funds?
The market’s interpretation of future Fed rate cuts will probably have the most impact on the shape of the Treasury and municipal yield curves. Our best estimate is that the Fed continues to gradually lower short-term rates, while intermediate- and longer-term rates remain range bound near recent levels. We think the yield curve should start to “normalize” into a more positively sloped structure. In the municipal funds we have sought to exposure to the 2–5-year segment of the curve that should perform well if the curve does steepen.
How would the extension of Trump’s tax cuts, as well as the lifting or elimination of the SALT tax deduction affect municipal markets?
If the SALT limits are raised, or the cap is eliminated altogether, this could modestly increase municipal yields in high-tax states like California and New York, but should have a relatively small impact across the broader market. The other impact that could come from the extension of the tax cuts is the reversion to the AMT (Alternative Minimum Tax) provisions prior to 2017. Some estimate this could raise over $1B in tax revenue as more investors would be subject to the AMT. If so, there would be less demand for municipal bonds that are subject to the AMT. However, because of a large supply of these types of bonds in 2024 and the anticipation that the AMT policies could change, spread levels on AMT bonds already largely reflect the risk of a policy change. Any further cheapening from current levels may actually present a buying opportunity.
Are you anticipating any major municipal bond impact related to infrastructure spending in the new administration?
While the new administration may change the projects that are eligible for the infrastructure funds, we don’t believe they will eliminate them. The amount of private money that has been raised to supplement the funds provided by the Federal government would imply that they continue to focus on infrastructure investments as it enhances economic growth and productivity over time. We would anticipate seeing continued investment in US infrastructure projects and related municipal bond issuance as historically, this has been an attractive way to fund these projects.
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1The Morningstar Rating™ for funds, or "star rating", is calculated for managed products with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent 3-year period actually has the greatest impact because it is included in all three rating periods.
The Baird Strategic Municipal Bond Fund (Institutional) received an Overall and 3-Year Morningstar Rating of 5 stars out of 255 funds in the muni national intermediate category and a 5-star rating for 5-years out of 240 funds in the same category for the period ending November 30, 2024. The Baird Municipal Bond Fund (Institutional) received an Overall and 3-Year Morningstar Rating of 5 stars out of 162 in the muni national long category and a 5-star rating for 5-years out of 156 funds in the same category for the period ending November 30, 2024.
