Fixed Income

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Letter from the CEO & Managing Editor

Contributors

During the 118th Congress, lawmakers are facing a steep climb to advance their priorities. With a divided Congress and slim margins in both chambers, getting anything to the president’s desk is going to be a big lift, but understanding the parties’ respective agendas and where they may overlap can go a long way toward navigating the policy arena in Washington, DC.

Mitchell Smith is the director of Government and External Affairs at the Council of Development Finance Agencies.

The first quarter of 2023 has been defined by high volatility and low primary issuance. In the first three months of the year, the MMA 10-year price index reflected a record or near record monthly gain or loss. YTD, the municipal price index has posted a cumulative gain of ~2.9%.

Over the past year, the municipal market has been increasingly drawn into the cultural and political wars over the increasing integration of “ESG” factors in investment management. Several conservative-leaning states have joined together to decry the potentially negative impact of ESG factors on their debt ratings.

Every investment in the MBS market is “long duration/short volatility.” A proxy for MBS is to buy an Agency bullet and short/sell options to earn additional income. The level of volatility is the price of the options, and therefore, it determines how much income is earned. However, volatility in this context is not directly observable; rather it is “implied” by the price of the option in relation to its strike price and tenor.