Bonds: Munis
(New York)
Model portfolios are getting ever more popular for advisors. Not only do they help outsource some portfolio management, but there is such a wide variety of them that they can be tailored to many different plans. In some cases, there are almost too many! One area where they make a lot of sense is in tax minimization strategies. Biden and the Democrats look like to hike taxes considerably, and that fact coupled with ultra-low yields and highly variant financial situations in muni bonds, means there is a lot to gain from models in this area.
FINSUM: COVID affected municipalities in very different ways, and spreads to Treasuries are historically low, so there is a of risk. Nuveen is seen as a leader in the munis space, so a good place to start the search.
(Washington)
Investors may fear it, but we all know the big tax package is coming. Personal income tax rates, and likely business rates will rise. State and local taxes will be affected too. So one big question is how this will pay out for muni bonds. The answer, at least according to Franklin Templeton, is that munis are going to do great. The reason why could not be simpler: with tax rates rising, the relative value of munis rises since their tax exempt status because relatively more valuable.
FINSUM: Anxiety about the forthcoming tax plan is rising, and that is a great tailwind for munis. Couple that with the fact that Democrats are more in favor of federal support for municipalities and you have a great combination for muni bonds.
(New York)
Even before the pandemic and subsequent crisis, the high-yield Muni market failed to deliver the returns after taxes that the corporate bond market…view the full story on our partner Magnifi’s site
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(New York)
The muni market is in a very interesting place. Despite the overall erosion of credit quality for municipalities since the pandemic began, demand for munis is at an all-time high and returns have been great. Yields are very low, but until very recently, they still offered a substantial benefit over Treasuries. All of this has coincided with a major change to the space: the infusion of institutional investors. For decades, the muni space has been dominated by HNW individuals and their advisors, but over the last couple years, institutional buying has been rising strongly. According to a study by an industry body “Over the last decade, customer purchases of fixed-rate, tax-exempt municipal securities of $100,000 or less decreased by 46%, the MSRB found. Meanwhile, institutional-sized purchases of over $1 million increased 46% in the same time period”. “Most of the large retail managers have moved clients from traditional, transactional, retail accounts into discretionary platforms like SMAs … The firm itself then makes the allocation decisions and is, therefore, less responsible for making sure that the client understands their investment decision”, said Matt Fabian, partner at Municipal Market Analytics.
FINSUM: This is actually good news for all involved—retail investors and advisors included (in a broad sense)—as it improves liquidity and tightens spreads.
(Chicago)
Municipal bond market returns remain low, but nonetheless investors seem willing to keep demanding low yield munis. This rise in demand...view the full story on our partner Magnifi's site.
(Washington)
Munis bonds have done well recently, but the ultra-low rate environment seems to have confused many about their relevance. It is critical to remember that despite yields being so low, munis still very much have a place in the environment. In fact, one could argue the current environment is better for munis than a more conventional one. The reason why is that munis still have a major spread advantage versus taxable equivalents. For example, while munis only yield an average of 0.86% right now, that translates to a taxable yield of 1.53% for those in the top income bracket. However, as we all know, Treasury yields are still much nearer to 1%, meaning munis current enjoy a major advantage over taxable bonds.
FINSUM: Given Biden and the Democrats’ support of state and local municipalities, and munis’ currently yield advantage, there is no reason for the asset class not to have a great year.