Wall Street says this has been the worst year for local bonds ever. That means buyers who want a safe place to put their money should consider municipal bonds.
The municipal market is full of cash, and income is going up. Due to a lack of supply, low rates, and small spreads, the market for municipal bonds is one of the best in history.
Even though the market is going down, buyers of local bonds are still worried about credit risk. This danger is caused by the chance that a borrower won’t repay the money they owe.
High credit risk can hurt the lender and the user by messing up cash flow and making it more expensive to get the money back. It can also force a bank to use more cash to cover losses, cutting its earnings.
Tax reform and the Federal Reserve’s aggressive effort to raise interest rates have made this a hard year for the local bond market. Even though we still expect the market to be very volatile, overall performance will slow to a more normal rate as rates move closer to the stable rate of 2.5% set by the Fed.
The prices of municipal bonds are still good, especially for long-term bonds with a maturity of 10 years or more. Prices of munis should stay fixed because supply and demand are in their favour. Also, we still see some opportunities in lower-rated credits because the outflow-driven widening of spreads and a risk-off situation has made some credit values look better.
So far in 2022, fixed income has been hard, but Wall Street says the worst is over. Investors should take advantage of this market chance and invest in a broad mix of local bonds to get good returns without worrying about the continued volatility in the interest rate markets.
The rate sell-off has caused credit spreads to get wider, but credit quality stays high. In addition to being able to handle the Fed’s tighter policy, credit conditions continue to be helped by record-high tax payments and savings for bad times.
Even though the number of new issues has decreased in recent months, there is still more demand than supply in this market. We are looking for signs that this situation is getting better. The drop in taxable municipal bonds should also help keep prices up in this market.
Municipal bonds face many risks, such as those related to the market, interest rates, the seller, credit, and inflation. Because of this, you should only put money into a fixed income strategy with the help of a professional planner.
Most of the time, the federal government doesn’t tax the interest from local loans. Depending on your tax rate, you may also get a tax break from your state or local government when you buy muni bonds.
You may also have to pay state and local taxes on short-term and long-term capital gains when you sell a bond. This could affect your business as a whole and your taxes.
The main reason why buyers choose to buy muni bonds is because of how they are taxed. But before you decide on an investment, you should always know how it will affect your taxes.
After any asset class had the worst year-to-date performance, many investors realise that local debt has much going for it. The amount of money that doesn’t have to be taxed is at a record high, and the credit market is in good shape.
But higher interest rates could slow down the success of munis. Recently, the Federal Reserve raised interest rates by 300 basis points (bps), and market players expect them to increase even more.
Investors are also worried about the recent rise in inflation, which could hurt several local credits if it keeps going up at this rate. For example, the value of some bonds backed by gas taxes per gallon or public transportation fares could go down as these things increase.
In the past, failures on local bonds have happened very rarely. Moody’s Investor Service says the failure rate was 0.08% from 1970 to 2020.
Leave a Reply