Is a pinch in the supply of municipal bonds putting a crimp in opportunities for investors?
We’re not seeing it.
A host of stories lately note a cutback in muni issuance. Indeed, borrowing by state and local governments in the first half of this year is down 17% from the same time last year, and is expected to be off by about 25% by the end of 2018.
Drop in muni supply was expected
But it was a development everyone expected (“Muni Bond Issuers Hedging Ahead of Tax Law”).
Amid last year’s overhaul of the tax code, Congress and the president weighed various proposals, from cutting some types of tax-free bonds to eliminating them altogether.
Hedging their bets, borrowers responded with a flood of issuance at the end of 2017.
As it turned out, the final bill removed the tax exemption for advance refunding bonds, which, unfortunately, deprives public borrowers of an important way to cut their financing costs. Naturally, it also had the effect of lowering issuance.
But fewer municipal bonds in the aggregate doesn’t mean investors’ choices are limited.
First, consider the sheer size of the U.S. municipal bond market: Almost $4 trillion.
Though not all outstanding issues make sense for individual investors, it’s inconceivable that investors can’t find bonds that make sense for them.
Additionally, while investors generally favor bonds from their own state to take full advantage of the interest exemption from local, state and federal taxes, it also makes sense to look for bonds from other states that provide better after-tax yields.
This affords investors a wider selection in terms of credit quality and offers choices beyond the unique economic condition of their particular states, while still earning interest exempt from federal income taxes.
For example, we currently have available AA-rated insured bonds yielding 3.75%, which provide impressive taxable equivalent yields.
Invest in bonds, not headlines
Successful muni investors don’t buy bonds from headlines.
They carefully look for certain bonds that suit their specific objectives.
An infinite supply of bonds isn’t as important as the right bonds, and we can help you find them.