That could be further broken down by 10% to 15% BBB/Baa and 25% to 30% A/A. As a rough starting point, we would suggest putting no more than 40% of a muni portfolio in BBB/Baa and A/A rated issuers. Although we think that it’s appropriate to add some lower-rated issuers, we would caution against adding too much as they are still prone to more volatility relative to higher-rated issuers. Valuations are more attractive in the lower-rated portion of the muni market. Given our positive view of credit quality, we suggest that investors moderately add some lower-rated issuers to their portfolios. A bond ladder strategy can be appropriate, because it can take the guesswork out of trying to time interest rates. We would suggest investors target a below-average duration, because bonds with lower durations typically experience smaller price declines to rising interest rates. We expect 2022 to be characterized by some volatility but ultimately better investment opportunities than so far in 2021. Since taxes may not rise as much as originally proposed, we would expect muni yields to rise and the breakeven tax rate to fall. The breakeven tax rate is near the highs over the past decade. As illustrated in the chart below, this rate is currently 47.1%, meaning if an investor’s combined tax rate (federal, state, local, and other applicable taxes) is above 47.5%, munis yield more than corporate bonds after taxes. The “breakeven” tax rate is the tax rate at which a municipal bond will yield more than a corporate bond before adjusting for taxes. The muni market responded to the prospect of higher taxes with yields moving lower relative to taxable alternatives as illustrated by the change in the “breakeven” tax rate. At higher tax rates, munis generally yield more than comparable taxable bonds like corporates or Treasuries. Municipal bonds generally pay interest income that is exempt from federal and potentially state income taxes. Among the original proposals were to increase the top tax rate to 39.6% from 37%, limit allowable deductions, levy a 3% surtax on individuals with an adjusted gross income above $5 million, and increase the top corporate tax rate to 26.5%. They could be added back in as negotiations move along but there is strong pushback against raising taxes. To help pay for the Build Back Better spending package, Democrats originally had proposed increasing taxes on top earners, but as of this writing, many of those proposals were dropped. As a result, credit concerns ebbed and prices on muni bonds didn’t fall as much as other fixed income sectors, resulting in munis outperforming most other highly rated fixed income sectors. The economy also recovered much quicker and stronger than expected. Instead, Washington threw a life raft to the muni market. ![]() Treasury bond).Įarly in 2021, there were concerns that the ongoing pandemic would create waves for the finances of some municipal issuers and lead to downgrades. Portfolios that are appropriately positioned should benefit from the rise in spreads and yields over time (a spread is the difference in yield between two bonds of comparable maturity, and reflects the additional compensation investors require to own a security relative to a highly rated alternative, such as a U.S. This may result in near-term price declines, but we expect there will be opportunities for higher yields. Our outlook for 2022 is that both spreads and yields should modestly increase. Environmental, Social and Governance (ESG) InvestingĬurrent low yields and tight spreads in the municipal bond market have made it difficult for investors to find opportunities to earn attractive interest income on their investments.Bond Funds, Bond ETFs, and Preferred Securities.ADRs, Foreign Ordinaries & Canadian Stocks.Environmental, Social and Governance (ESG) ETFs.Environmental, Social and Governance (ESG) Mutual Funds.Benefits and Considerations of Mutual Funds.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |