For many, many years muni bonds have been the go-to for tax-free income. While their yields were lower than conventional credits, there was usually a significant cost-savings by investing in the bonds because of the lack of taxation. However, the muni market is so over-bought that it is very difficult to find bonds where that is still the case. Prices have moved yields so low that there are virtually no savings versus Treasuries. 2019 saw muni bonds experience their highest inflows since 2009, and according to Morningstar “For most taxpayers, there’s no longer a significant yield advantage for muni funds after you take taxes into account”.
FINSUM: Weak yields and no savings, which is going to push investors to buy ever riskier munis. Boom time coming for lower-rated credits?
Barron’s has published a wide-ranging article look at the whole “income” universe and where investors should put their money. The caveat is that it is a hard time to invest for income because yields are so low. That said, there are some opportunities. A few short-term bond funds look quite compelling at the moment. Two funds from Pioneer (MAFRX) and Pimco (PFIAX) both look interesting, sporting yields of 3-3.5% on bonds with much lower rate risk. Junk bonds are yielding 6%, but you can get over 7% in closed end junk funds. Munis look like a good buy on a fundamental basis, but their yields are quite low; versus Treasuries they still have good relative value, however.
FINSUM: The trick here is that many want to keep some bonds in their portfolio despite what has gone on in fixed income markets. We would stick to short-term bonds for the most part as they have comparable yields to longer-term offerings, but less risk.
If you are looking for some good muni bonds to add to your portfolio, take a look at an interesting new offering from a group of US universities. Georgetown, University of Pennsylvania, and Rutgers have all issued “century” muni bonds, and they may prove a good investment. Rutgers’, as an example, yields 3.9% and has an A+ rating, a significant spread to the typical 3.2% yield on other long-term muni bonds. Even BBB bonds, which are in a tenuous position, are only yielding 3.2%.
FINSUM: The yield is great, but your great grandchildren will be getting the principal back!
The muni market has traditionally been a safe haven for investors seeking steady returns. However, things are beginning to change. The huge drop in yields is fueling some very risky behavior in certain corners of the muni bond market. With yields on even the riskiest munis down to about 4%, highly speculative borrowers, such as those building risky mall developments or far-away housing projects are raising muni money through governmental agencies.
FINSUM: Investors need to look out for these kind of deals. However, what could be more troublesome is how they will inevitably end up in many popular funds without investors even having awareness of them.
The muni market seems healthy. Other than the cases where budgets are exploding, the market as a whole has characteristically low yields and looks stable, especially because of excess investor demand from the recent tax changes. However, there are structural concerns about the market. Nuveen and Vanguard have come to dominate the market through their funds, sucking up to two-thirds of all the Dollars flowing into the market in the last decade. This is because investors have been increasingly buying muni funds, not individual securities. However, according to UBS, this is a big risk. “When everyone runs for the exit at the same time…no one wants to be the buyer of last resort … The concentration in large municipal asset managers will have ramifications during volatile times in that it will make the swings greater one way or another”.
FINSUM: Everyone has been warning about big runs on fixed income funds in a market downturn, but evidence of such has yet to materialize.