It’s a question we hear every so often, usually by an investor new to the municipal bond market:
“With yields so low, why would anyone buy munis?”
For successful fixed-income investors, of course, today’s financial ups and downs are virtually irrelevant. Their concern is simply, “How do I keep my money constantly working?”
Let us explain.
Bond rates are at historic lows because of the enormous and seemingly insatiable demand for conservative fixed-income investments. For investors in the higher tax brackets, today’s muni returns are extremely attractive compared to the after-tax returns on taxable bonds of comparable quality.
There is a massive amount of investment dollars flooding into the municipal bond market – 38 weeks of inflows just into muni funds, according to Lipper.
Muni yields attracting even foreign investors
The muni market is so appealing, foreign investors are jumping in, a remarkable phenomenon considering there is no tax benefit for non U.S. citizens. Many are looking for stable, dependable income after receiving microscopic interest or even negative returns on their holdings. Brexit, meanwhile, will likely further increase demand from both domestic and international investors.
So instead of asking why would anyone invest in munis, the better question is, why wouldn’t they? In this economic environment, we are hard pressed to come up with any reasonable alternatives.
For more than 10 years, savers have been punished by earning next to nothing as they parked funds in money markets and CDs, settling for negative returns after inflation. This isn’t changing anytime soon.
Retirees and conservative investors have little stomach for the volatility and uncertainty of a stock market that, until recent days, has perched near all-time highs while earnings inexorably decline year after year. Investment dollars are fleeing hedge funds as portfolio managers continue to underperform the averages.
Considering even the pros can’t produce a return on investment, the equity markets are clearly not for the faint of heart.
The long (and futile) wait for muni rates to rise
But if yields are low, they must be about to rise, right?
Well, if you spend a little time reviewing our News and Perspectives , you will see the majority of so-called experts and pundits have been calling for higher interest rates for well over 10 years.
Contrary to these seers, we have never claimed the ability to divine the path of interest rates. Instead, we have steadfastly maintained that predicting interest rates is a futile exercise, even for the most brilliant economists.
Regardless of muni rates, make your money work
Our philosophy has always called for putting investment dollars to work when they’re available and not trying to “time” the market. We recommend longer-term bonds to maximize tax-free income. After all, that’s why investors buy munis in the first place.
These principles have served our clients well over the years, whereas proponents of buying short-term bonds and laddered portfolios have sacrificed significant tax-free income and are continually forced to reinvest short-term bonds coming due at lower and lower yields.
Although we are in a 3.00% world today, our clients continue to own portfolios with 4.00%, 5.00% and even 6.00% bonds (if not called or pre-refunded at a premium).
While some new investors may not be familiar with the finer points of the municipal bond market, successful ones know the score. They’ve gotten ahead by keeping their interest clock ticking, regardless of prevailing economic conditions.
