Featuring:
Tim O'Reilly
Head of Institutional Municipal Portfolio Management
Invesco
Discover why Invesco sees timely opportunities in today’s municipal bond market, from multi-year-high yields and attractive valuations to strong credit fundamentals. In this episode of CEF Insights, Tim O’Reilly explains how Invesco’s research-driven approach identifies opportunities in high-yield securities, the steep municipal yield curve, and strategic portfolio leverage. Tune in to learn how municipal closed-end funds may help income-focused investors pursue attractive, tax-advantaged income in a changing rate environment.
Invesco manages a range of fixed income strategies designed to help investors meet their income and total return objectives, including municipal bonds, taxable fixed income, and senior secured loans.
Transcript
CEFA:
Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association.
Today we are joined by Tim O'Reilly, Head of Institutional Municipal Portfolio Management with Invesco. Invesco manages over $60 billion in municipal bonds for investors, including 10 closed-end municipal bond funds.
We're happy to have you with us today, Tim.
Tim O’Reilly:
Yeah, great. Thanks for having me today. I'm excited to talk about the muni market and the closed-end space, and there's a lot going on, so a lot to cover.
CEFA:
Awesome. Tim, the municipal bond market presents a diverse range of opportunities for potential investment. In managing your closed-end fund portfolios, can you discuss the investment team's core strategy?
Tim O’Reilly:
Yeah, sure. So, the core strategy here for Invesco on our municipal platform, it's really a bottom-up fundamental research philosophy. We have a team of 23 dedicated municipal research analysts. So, all they do is look at muni credit all day long. And as part of that process, they assign internal ratings and outlooks to everything that we consider purchasing. So that really is the foundation of our process is utilizing that bottom-up fundamental credit research and leveraging the expertise of that 23-person research team. And then on top of that, will obviously rely on some top-down analysis, and that's going to be driven by our investment strategy team. And that is made-up of investment professionals across Invesco from all the various different fixed income areas. And that's where we're really able to formulate our macro overview. So, we try to marry up the bottom-up fundamental research from our team. along with the top-down macro strategy from the investment strategy team. And that's really the core investment philosophy for our municipal team. We have a team-based portfolio management strategy, so we did not implement sort of the star manager approach. So as part of that team-based portfolio management, portfolio managers also act as their own traders. So, we're really in touch with the market, and we try to leverage all that expertise that comes with the research team as well as the PM team and their trading expertise.
CEFA:
What is your process to evaluate this investment universe to develop a workable set of potential investments?
Tim O’Reilly:
Yeah, so when we look at that, there's really, you have the primary market and the secondary market. So, starting off with the primary market, we host a call on Monday afternoon on a weekly basis, and that's where we'll go over all of the deals pricing in the primary market for the week. So, the research analyst assigned to that particular credit will present some of the details and we'll talk about some of the strengths and weaknesses and other competitive deals in the market. And we'll go over that in some detail. So, it's a good two-way flow between portfolio managers and analysts on everything that's coming in the primary market. And that's where after that call, we'll talk as a PM team about deals that make sense and where we might want to position things. Where we might want to go back to the underwriter and ask for some changes in some of these deals. And then we also host a weekly portfolio management team meeting where that's really where all the PMs, so there's 10 dedicated PMs here at Invesco on the muni side. And we'll talk about things like curve positioning, sector rotation, what structures look most attractive in the market, where do we want to be on our duration targets, and so on and so forth. And then from there, we really go back to relying on the internal rating assigned by our analyst when trying to determine the best relative value opportunities. There's periodic surveillance done on everything that we own or consider purchasing, but there's also a great deal of ad hoc analysis that goes on, just trying to stay in front of the rating agencies and make sure we have the most relevant information at the time we're making the investment decision. So that's how we really look at the whole universe. We have the primary market; we have the secondary market. We meet as a team of portfolio managers and see where we want to go be positioned, and then we'll try to leverage both those primary and secondary markets to capitalize on those opportunities.
CEFA:
How do you then make specific security selections and allocate those positions as you build your portfolio?
Tim O’Reilly:
Yeah, so specific security selection really sits with each portfolio manager, right? Or with the portfolio management team, I should say. We talked about a bit of the process in the investable universe, but then making the specific selections will boil down to the portfolio management team. So, munis are primarily an over-the-counter market in the institutional space where we operate. And as I mentioned, the portfolio managers are responsible for their own execution. So allocations, once we decide to execute a trade, allocations are going to be based on a number of different variables. We have to factor in cash. We have to factor in portfolio objectives. We have to factor in the order size and how much of that order is ultimately getting filled, especially when we're looking at something in the primary market. We're looking at compliance rules and so on and so forth. So as far as security selection and allocation. It really comes down to the portfolio managers. There's not one or two independent variables you can point to. There's a whole bunch of things that go into those types of decisions.
CEFA:
Tim, the Federal Reserve recently increased rates, while markets have taken longer term rates higher. Economic growth has been resilient, but inflation remains above the Fed's target. Where do you see the fixed income markets currently, and what is your outlook for the rest of 2026 and into 2027?
Tim O’Reilly:
Yeah, that's an interesting question because there's obviously a lot of moving pieces and things have been changing around here very quickly. We did have the Fed increase rates earlier this month in September, by 25 basis points. And that was something that I think some participants in market felt maybe was a little bit late, but they did move rates a little bit higher. Our stance has been that we're going to be higher for longer. We did see a pretty significant move in the Treasury market, whether you're looking down the curve or out on the long end. Over the last couple of months, the market obviously pricing in some of the things going on in the economy, but also some of the comments out of the new Fed Chair Warsh. And the market digested that with maybe less transparency, maybe moving the goalposts a little bit has resulted in the market selling off here over the last couple of weeks. Inflation has been sticky. We did see the PCE print come in this morning a little bit below consensus and we saw revision from the previous month downward. So maybe that's the start of inflation. Inflation's starting to moderate a little bit after some of the oil shock that we saw take place over the last several months. As far as our view on where rates go from here, the market, I think, is a little bit more hawkish than we are currently. When you look at the market pricing somewhere between 3 1/2 to 4, hikes through 2027. Our base case is for something less than that. When we sit here today, maybe that's two to three as we get through 2027. So, we feel like rate hikes in general are a little bit overpriced at the moment, and we might get one more increase this year at the December meeting, and then maybe one or 2 increases in 2027.
CEFA:
Focusing on the municipal bond market, what are your expectations for new issuance with regard to quality and diversification of issuers?
Tim O’Reilly:
Yeah, issuance has been kind of a hot topic here in our market. We're on pace for another record year of issuance, year to date, and I think issuance has totaled somewhere around $430 billion. That's up 6% year over year. 2025 was a record year for new issuance, so we're on pace to exceed that amount here. So, in 2026 through really the first three quarters of the year, you know, issuance has been fairly diversified across the usual muni sectors that you would see in a typical year, you know, say in local governments, healthcare, utilities, transportation, housing, and so on and so forth. We have seen the trend of lower overall high yield issuance now as a percentage of the total issuance. Last year, below investment grade and non-rated names accounted for somewhere around 7% of the total issuance. This year, that's somewhere around 5%. We've also seen more issuance down the curve versus years past. Issuers are taking notice of the steepness of the muni curve and the changing demand dynamics from the SMA community and the passive strategies and have started to price more short and intermediate bonds in the deals that they're bringing to the market.
CEFA:
Are you finding municipal bond valuations to be broadly attractive?
Tim O’Reilly:
Yes, as we sit here today recording this, yes, with the adjustment that we've seen on a quarter to date basis. And I saw a stat yesterday that September has been the worst month for returns in munis since 1987. So yes, with this adjustment in valuations with high overall absolute yields, you have yields on various muni indices that are approaching multi-year highs. If you're willing to take on a little bit of additional credit risk, you can get 6 to 7% type yields in the high yield space. That means that you're looking at near double digit or double digit taxable equivalent yields for the highest tax brackets. So, we're finding valuations much more attractive than we did earlier in the year. We've seen the muni to treasury ratio, so, AAA munis over 30-year treasuries widen out from the mid-80s earlier this year to, we touched 93% here in the last day or so. The adjustment we've seen has made valuations much more attractive.
CEFA:
How do municipal bond valuations compare to taxable fixed income securities?
Tim O’Reilly:
Yeah, so I mentioned just a moment ago the muni to treasury ratio. So that's sitting right around 92, 93% at the time of this recording, and that's near the year to date high. So relative to the treasury market, munis have become more attractive when you look down the curve, whether it be in the 5 or the 10-year space. We've seen ratios back up even more there as that 10-to-15-year spot of the curve has underperformed the most on a year-to-date basis. So relative to, when we say the taxable fixed income market, relative to treasuries, valuations have gotten much more attractive. Relative to the investment grade corporate bond market on a tax adjusted basis, we've seen valuations become more attractive relative to our corporate counterparts as well, over the last quarter. So, muni bond valuations have become, in our opinion, very attractive here as of late.
CEFA:
Where are you seeing the best opportunities in the municipal bond space?
Tim O’Reilly:
Currently, we still favor the high yield space, as we've highlighted on this podcast so far. Munis don't have a credit problem. They've had a rate problem of late. And that's, I think, something that can be said for a lot of other fixed income. Credit remains in a very strong position. We don't have any real concerns about any of the sectors, whether that be investment grade or high yield. We've seen high yield outperform on a year-to-date basis relative to investment grade. And we think that trend can continue here as we head into the fourth quarter and into 2027. So, one of the best opportunities we're seeing is in the high yield space. Also with the recent backup, we like the steepness of the muni curve, especially if we're looking at the closed end investor where there's going to be some leverage in the portfolios. The muni curve, you pick up somewhere around 150 to 155 basis points going from the two-year spot to the 30-year spot. That compares to 75 basis points for the same 2 to 30-year spread on the Treasury market. And in reality, the curve is actually steeper than that because you do pick up some additional credit spread on top of the curve when you go out longer. When we talk about the muni curve, we're talking about the AAA MMD curve. But when you layer on top of that a little bit of spread and you pick up more spread as you go out longer, the curve is actually steeper than that. So, with higher attractive valuations, high absolute yield and the steep muni curve, we've started to take a closer look at leverage as well. So, we like high yield, we like the steepness of the curve, and we're starting to take a much closer look at leverage opportunities.
CEFA:
What are the most significant risks in the current environment?
Tim O’Reilly:
You know, in this environment, really, I talked about munis don't have a credit problem. They've got a little bit of a rate problem, and that's not exclusive to our market. It's really the headline risks and how the retail investor will digest those risks given that such a large percentage of the muni market is owned by the individual retail investor, whether that be in funds, SMAs, individual bonds, ETFs. So, the geopolitical market, the market trying to handicap the Fed and what Chairman Warsh will do and how it might be different than previous chairs, noise around the midterm elections coming up here, and obviously the impact of the war in Iran, the energy crisis, the impacts that's going to have on the economy on rates, those types of headline risks could lead to an outflow cycle. And I think that's one of the most significant risks. Given the pace, the record pace of supply we've seen in the primary market, it’s been digested relatively well because inflows have generally been strong. So again, I think one of the biggest risks is that we enter into an extended outflow cycle where we could see spreads widen and munis underperform other fixed income.
CEFA:
How are your portfolios currently positioned?
Tim O’Reilly:
So that's an interesting question because we have a pretty deep and diverse product lineup here at Invesco. We have 16 open-end funds, 10 closed-end funds, and two active ETFs. So, depending on the objective of the strategy, those are all positioned a little bit differently. I think I'll focus on the closed-end funds. So, we have 10 different closed-end funds, 7 national, and three state closed-end funds. And 9 out of the 10 of those have a mix where you can be up to 20% below investment grade. So, I mentioned how we're constructive on the yield space and how we really leverage our team of 23 research analysts. So, the portfolios, those closed-end portfolios generally are positioned where we're trying to maximize that percentage that we can have in the below investment grade and non-rated buckets. Then on top of that, we've talked about the steepness of the curve, how you can pick up that additional spread relative to what you see in the treasury market. So, with this backup in valuations here as of late, we've also started to get more constructive on leverage and we would look to add some additional leverage to the portfolios.
CEFA:
Tim, how do you see an allocation to municipal bonds, particularly in a closed end fund structure, best positioned in an investor's income-oriented portfolio?
Tim O’Reilly:
For an income-oriented investor on a taxable equivalent basis, and this will all be dependent on the individual tax rate, leveraged municipal closed-end funds offer a tremendous amount of risk-adjusted income. We've talked about the steepness of the curve relative to treasuries and the added value leverage can have there. And at the time of this recording, many muni closed end funds have started to trade at a slight discount to their NAV. Where if we're having this conversation a handful of months ago, those would have been at a slight premium. So given the sharp increase in rates during the second quarter, where the general Bloomberg Muni Index was down about 7%, and given that we're at multi-year high in yields and the extremely attractive taxable equivalent yields and just general stable credit environment in munis, we feel like now is a great time to take a really close look at the Muni closed end fund space.
CEFA:
Tim, thank you so much for taking the time to join us today.
Tim O’Reilly:
Yeah, thank you for having me, and hopefully we can do this again sometime soon.
CEFA:
We want to thank you for tuning in to another CEF Insights Podcast. For more educational content, please visit our website at www.CEFA.com.
Podcast recorded September 2026.
Disclosure
This material is not, and is not intended as investment advice, an indication of trading intent or holdings, or the prediction of investment performance. All fund-specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
Invesco disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Invesco does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or a solicitation to sell or solicitation of an offer to buy any security, product, investment advice, or service, nor shall any security, product, investment advice or service be offered or sold in any jurisdiction in which Invesco is not licensed to conduct business and/or an offer, solicitation, purchase or sale would be unavailable or unlawful.