Displaying items by tag: munis

(Washington)

This midterm election might have ended up being very consequential for muni bond markets. Some in the muni market feared the possibility of the Republicans maintaining control of both the House and Senate because of how further tax changes could have hurt the finances of municipalities. However, now that Congress is split, the outlook seems more favorable. The reason why is that Congress now looks more likely to restore a tax exemption for a debt refinancing strategy that is often used by local governments.

FINSUM: Just like in other asset classes, having a split Congress looks favorable for munis.

(Washington)

Here is an eye-opener for investors: one of the biggest market reactions to the midterms is likely to be in munis. In particular, yields on munis are expected to fall is the Democrats take the House, which would result in a split Congress. The reason why is that such an outcome would likely limit the further possible damage that could be wrought by Republican tax proposals. However, since the market is anticipating this outcome, if Republicans do maintain their hold on the House and Senate, then yields could rise sharply. The call on the moves comes from Barclays.

FINSUM: The most likely outcome right now seems to be a blue House and a Red Senate, which would mean smooth sailing and likely gains for munis.

(New York)

You wouldn’t usually think of muni bonds when you are looking for juicy yields (at least not investment grade munis). However, if you look further out on the yield curve, there are some very interesting bonds. For instance, there are AAA rated 15-year munis yielding 2.7%, up from 2.2% earlier this year. Comparable two-year munis have just 1.7% yields, representing a 100 basis point spread versus the treasury market’s 29 bp spread. This is the steepest the muni yield curve has been since 2000, which creates opportunity at the long end of the curve.

FINSUM: Most advisors will be aware that even with the currently low yields in munis, the tax exemption for high income clients make the bonds very attractive, so this is just icing on the cake.

(New York)

When the Republican tax reform package came out last year, there were fears that the changes could cause weakness in the muni market. However, while those potential long-term challenges remain, the reality is that the tax changes have helped the muni market considerably. The reason why is that the lack of SALT deductions means that many more investors have a strong inventive to buy muni bonds. This has kept yields low and demand robust, as for a high income couple in states like New York, a local muni bond yielding 3% is equivalent to a taxable corporate bond yielding over 6%.

FINSUM: Given the way that the new tax package heavily incentivizes muni income, we expect demand and prices to remain robust.

(Chicago)

Barron’s has put out an interesting article outlining a key correlation in the muni market. We thought it was worth some coverage. A new study out of the University of Illinois has found that muni bond yields tend to lose when local newspapers shut down. Local media often keep local government spending in check and work as a balance on corruption and mismanagement. A multi-year study of the muni market found that yields tended to rise when these papers shut down. The authors summarize “The loss of monitoring that results from newspaper closures is associated with increased government inefficiencies, including higher likelihoods of costly advance refundings and negotiated issues, and higher government wages, employees, and tax revenues”.

FINSUM: This makes perfect sense to us. The problem is that local newspapers have a bleak future at the moment, so the hopes of them serving as a watchdog in the future looks highly unlikely.