Despite some high-profile scares in the municipal debt market, muni bonds and related exchange traded funds are still a relatively safe asset class, provide attractive tax-equivalent yields and offer increased diversification.
On a recent presentation, "What’s Next for Municipals?", Blair Ridley, Director and Portfolio Manager for Deutsche Asset & Wealth Management, points out that the majority of municipalities are on a strong footing.
“Municipal revenues continue to increase and defaults continue to decline,” Ridley said.
State collections have increased for 16 consecutive quarters after declining five straight quarters during the recession. Municipalities have also kept their debt-to-GDP relatively stable over the past five decades. State and local debt-to-GDP have remain below 20%, whereas federal debt ratios have increased to over 100%.
Moreover, credit agencies have recently upgraded some states’ credit ratings due to their decreasing budget deficits, including California and New York.
The muni market is also being supported by a record low supply of new issuance. Some analysts expect new issuance of $300 billion or less in 2014.
The recent swings in the munis market are attributed to the high-profile bankruptcy filings in Detroit, Michigan and Stockton, California, along with financial problems in Puerto Rico. Specifically, general-obligation bonds, which are backed by credit an the taxing ability of the issuing municipality, are under increased scrutiny as some cities fail to generate enough tax revenue to cover their debt.
Municipal bond investors can enjoy attractive yields, especially those who are in higher income brackets. After the tax hikes in 2013, investors in the top bracket generated a 6.18% tax-equivalent yield in 2013, compared to a 5.38% tax-equivalent yield in 2012, on muni bonds with an average 3.5% yield.
Furthermore, muni investors offer attractive diversification benefits, showing a low correlation to equities and other fixed-income assets.
Municipal bonds have historically provided attractive risk/return characteristics, particularly when tax benefits are considered.
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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.86% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 19 August 2014). Year to date the portfolio is up 7.54%
The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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