If crypto is like skydiving out of a plane at 10,000 feet for the first time, then municipal bonds are the everyday commute to work. Both carry risk; one is viewed as much more risky than the other. Investors haven’t found them attractive in quite some time. But right now, municipal bonds are making a comeback, after a decade or more sitting on the sidelines while higher performing assets got asked to the dance.
Read on to find out why we’re giving “Munis” another look.
First, the Lingo:
Aka The Federal Reserve. The central bank of the United States, tasked with stabilizing our economy through monetary policy.
Policies enacted by the Fed to help stabilize the economy. Steps like setting the discount rate, adjusting bank reserve requirements, along with buying/selling government assets through open market operations.
Municipal Bonds. Bonds used by states, cities, and towns to finance various public projects. Often, the income paid out by munis is tax-exempt at the federal and state/local if you reside there.
Safety in a Time of Ambiguity
At TradeWinds, we’re keeping our eye on municipal bonds. Here are three reasons we think they’re an investment that may be poised for a comeback:
#1: FOMO (Fear Of Missing Out) has made it hard for investors to hold onto low performing bonds while the stock market has been on fire
Municipal bonds have largely been overlooked in the past decade for a few reasons. One is the performance arena we’ve been in. The U.S. stock market experienced incredible growth from 2012 to 2021 (the S&P 500 saw well above average returns of over 16%). In this environment, investors tend to flock to performance and overlook other asset classes and some of the investments within them. Such as munis.
But now, in a marketplace of ambiguity, the safety and security these investments can offer is making people rethink their attractiveness.
#2: The Fed has been very active and hands-on making use of their monetary policy toolbox
The Fed has been doing quite the dance with interest rates, between slashing them during The Great Recession, to keeping them down during COVID, and now the necessity to hike them up. Inflation concerns and uncertainty have investors considering looking towards the fixed income side of the market, where there’s the expectation you’ll get your money back – with a little bit of interest as the cherry on top.
Yields are starting to be attractive on bonds and, for now, are competitive with U.S. Treasuries, head-to-head. This means yields are comparable even with the advantage munis offer when it comes to taxes. We may even see yields increase with the Fed’s plans to raise interest rates several more times in 2022.
#3: States & Municipalities are sitting on piles of surplus money right now
Many munis are backed by the state/local government that is issuing them and the market views them as relatively safe investment as there’s an agreement for investors to be paid back their principle plus interest.
As a response to COVID, states have bolstered their own fiscal cushions to all-time highs. This means the “guy” you’re doing business with is pretty well off right now. North Carolina, for example, is close to the median for its “Rainy Day Fund” and has well-above average Total Reserves set aside. Overall, not only are yields becoming more attractive in this muni space, it appears like the quality of the deal is at a high.
Are Munis a Fit for Your Portfolio?
While there’s no ‘one size fits all’ when it comes to investments, TradeWinds is aiming to provide you with resources to give you the best chance at investment success. Munis may fit well in conjunction with a diversified portfolio along with offering tax advantages along the way. The stars are aligning to make munis attractive again and back to being a part of a balanced portfolio.
Thinking about adding Munis to your dance card?
- Go here to see how high budget surpluses are right now in your state
- Read this for Fed Governor’s thoughts on responding to high inflation
- Email us here to set up time to talk to a TradeWinds Advisor
The bottom line? Everyone’s appetite for risk is different, and in times of ambiguity, there is something comforting about a historically safer position. Municipal bonds may not be the sexiest investment option, but that doesn’t mean you shouldn’t get to know them better, either.
After all, that daily commute may not spike your adrenaline the way skydiving does, but it does get you where you want to go.
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