Abroad Appeal For Muni Bonds

Klotz on Bonds

Home > News and Perspectives > Abroad Appeal For Muni Bonds

<h3>James A. Klotz</h3>

James A. Klotz

To foreign investors, there’s nothing foreign about U.S. municipal bonds.

Repelled by low and sometimes negative interest rates in their home countries, investors outside the United States plowed a record $4.5 billion into munis during the last three months of 2017.

The fourth-quarter influx continues a streak that has seen foreign buyers increase their muni holdings every quarter for more than five years.

All told, foreign investors now hold $104.6 billion in tax-frees – more than double what they held a decade ago, according to Bloomberg.

Their ardor is remarkable, of course, given that individuals outside of the United States can’t benefit from the tax-free advantages of municipal bonds. For them, yields are the attraction.

Abroad Appeal For Municipal BondsU.S. munis and foreign companies

Foreign companies are particularly attracted to high-quality munis, both tax-free and taxable, according to Bloomberg. Companies like their ratings, spreads vs. Treasuries and they help diversify their investment holdings.

Overseas life insurers favor longer-term bonds, which are more common among munis than corporates, and recent European Union rules allow insurers to put aside less in capital for holding infrastructure debt than corporate bonds.

The enthusiasm by these companies, analysts say, is likely to continue.

More liquidity for U.S. muni investors

So how does this affect individual muni investors in the United States?

For one thing, there’s more liquidity in the municipal bond market as trading activity ticks up.

What’s more, it lays waste to the notion that the recently enacted tax cuts would slacken demand for munis. The gaping hole in that theory, of course, is that income taxes were lowered only slightly while deductions for state and local taxes were limited – hardly disincentives to own munis.

And the corporate tax cuts that were supposed to put the brakes on demand? We see no evidence of that.

In fact, U.S. institutions may soon be clamoring for munis. Under new rules expected to be approved by Congress, banks would be allowed to hold municipal bonds to satisfy liquidity requirements (“Making Sense of the Muni Market”).

So the fundamental attribute of munis since their inception – generating a steady stream of tax-free income – remains intact, a fact welcomed by U.S. bond buyers and, it turns out, foreign investors as well.

James A. Klotz is the President of FMSbonds, Inc.
Email the Author

Mar 28, 2018

Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.