Displaying items by tag: munis
Any way you slice it, 2021 seems like it will be a good year for munis, and not because the financial condition of municipalities is so great (it isn’t!). One of the main reasons why is the incoming administration and Congress. Between Biden’s stimulus plans and the now Democrat-controlled Senate, the odds for large amounts of local and state financial support from the federal government are quite high. This part of equation is well understood, but there is a second aspect of the Democrats’ plans that will also be beneficial to munis: they plan to raise taxes on the wealthy. Higher taxes on the wealthy would directly increase demand for munis bonds, which means they should have a tailwind this year.
FINSUM: The part about increased taxes and how it drives muni demand has not been discussed enough. We think this is an excellent angle and combined with financial stimulus, should set up a couple years of smooth sailing.
One of the big risks to the muni sector that has gone underappreciated by the financial media and investing community is the threat of the soon-to-be revamped SEC making some big changes to the asset class. See the full story here on our parnter Magnifi's site.
One of the big risks to the muni sector that has gone underappreciated by the financial media and investing community is the threat of the soon-to-be revamped SEC making some big changes to the asset class. The reason for concern is that Elad Roisman has just been appointed interim chief of the SEC. Roisman has long had a focus on transparency in fixed income markets, which he and others at the SEC feel is too opaque. This has raised the risk of new regulation in the space. That said, his short term before likely being replaced by Biden will limit his time frame to change any policy.
FINSUM: Roisman is a Republican and was previously chief counsel at NYSE Euronext, which gives him a very significant command of market structure. This would certainly equip him with the know-how to overhaul fixed income markets, but unless the Biden administration wants that to be a focus, it doesn’t seem he will have enough time. Bullet dodged or opportunity missed?
Munis had a wild and rough year in 2020. Everyone who invests in the sector is wondering what’s next. While the lack of direct state and municipal aid in the recent congressional package is a downer for muni investors, there is a lot to be happy about. Election certainty, good news on the vaccine front, and the inauguration of Biden are all raising the sector’s prospects. Biden is seen as more likely to help local state and municipalities with aid, which has raised prospects for the sector. Downgrades are a risk, but widespread defaults seem unlikely.
FINSUM: On the whole, things seem like they are set up for a pretty positive year. As to the possibility of downgrades, it is worth noting that downgrades usually trail economic performance, so they would take a while to come through.
Munis have long been very popular with HNW clients because of their tax exempt income. However, a new—and slightly confusing—part of the industry is increasingly becoming popular. That new niche is taxable muni bonds. According to Barron’s “Taxable municipal bonds are the fastest-growing sector in U.S. fixed income. This year, issuance has totaled more than $170 billion, double the $85 billion sold in all of 2019. The total market has grown to $700 billion—sizable but still below the $3.7 trillion tax-exempt muni market”. Many think the new vaccines will give a boost to munis, which have suffered under COVID.
FINSUM: If you are interested in this market, check out Invesco’s Taxable Municipal Bond ETF (BAB).