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.
U.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.