Why are Municipal-Bond Yields so Low?

The Bond Buyer’s 20-year index of general-obligation bonds reset at 2.56% this week.[1] That is the lowest in almost 64 years, since June 1956, according to Bloomberg’s records.[2] So why are municipal-bond yields so low?


In recent years investors have flooded into municipal bond funds, expecting to reap savings by owning nontaxable bonds... as a result municipal bonds are expensive compared to historical averages.

In recent years investors have flooded into municipal bond funds, expecting to reap savings by owning nontaxable bonds issued by states, municipalities and other local-government entities. As a result municipal bonds are expensive compared to historical averages. In fact, bond prices have risen so much, pushing yields down, that the value is getting tougher to find.


The problem is that most other income-generating asset classes are expensive, too. And with more than $14 trillion of global debt currently having a negative yield, investors continue to look toward muni bonds. [3]


In fact, many analysts are forecasting another potentially record-setting year for new bond issues. With seemingly boundless demand, investors added another $2.3 billion to municipal-securities mutual funds in the week ended Wednesday, marking the 54th straight week of inflows, according to Refinitiv Lipper US Fund Flows data.[4]


Given these current market dynamics it may be time for investors to reconsider maintaining their municipal bond allocations at full targets. While municipal bond interest payments are generally exempt from federal income taxes and may be exempt from state income taxes for in-state residents, there are quite possibly more advantageous tax-equivalent yields in other sectors that could add value to the portfolio. compare it with its taxable counterpart in the US Treasury, agency, corporate or sovereign bond market.


We at Miles maintain a focus on our clients’ strategic allocations, but recognize that market dislocations like these call for tactical portfolio management adjustments. There are many other factors beyond taxes investors must also consider when diversifying, such as credit quality, risk and duration. We analyze all options and potential investments to find the best potential value that aligns with our clients goals and constraints, whether in the municipal, corporate, securitized, Treasury or Agency space.


Contact us today to see how Miles Capital can help.



[1] https://www.bloomberg.com/news/articles/2020-01-17/-that-is-insane-muni-yields-at-the-lowest-since-elvis-was-king


[2] The 20-bond index is the oldest gauge of yields in the tax-exempt securities market, started by the newspaper in 1917.


[3] https://www.barrons.com/articles/100-year-muni-bonds-might-just-be-the-safest-yield-play-51570218247


[4] https://www.barrons.com/articles/100-year-muni-bonds-might-just-be-the-safest-yield-play-51570218247

Disclosures
 

The views expressed herein are the current views of Miles Capital as the stated date and are provided for informational purposes only. They are believed to be correct, but accuracy and completeness cannot be guaranteed and should not be relied upon for legal or investment decision purposes. All expressions of opinion and predictions presented are subject to change without notice. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is not a guarantee of future results. Diversification does not ensure a profit or protect against market loss. As with all strategies, there is a risk of loss or all or a portion of the amount invested.