Municipal Bond Ideas: Consider Taxable Munis

 

(June 2012) This month both Breckinridge Capital Advisors and Janney Capital Markets published articles in favor of Taxable Municipal Bonds. Overall, they are both very bullish on these bonds, because they believe Taxable Municipal bonds:

What are Taxable Municipal bonds?

Aren’t municipal bonds supposed to be tax free? Most municipal bonds are federally tax-free. However, typically 6-7% of municipal bonds of new municipal bond issues are federally taxable. Taxable municipal bonds fall into two categories:

  1. Build America Bonds which were only issued in 2009 and 2010 as part of a special economic stimulus package.
  2. Bonds which don’t qualify for a federal tax-exemption,  such as bonds that fund pension funds, worker compensation funds, and bonds to support private economic activities.

Taxable municipal bonds share the very high quality credit characteristics of the municipal market in general, with the majority rated Aaa and only 1% being rated below investment grade.

 

Janney: Corporate Bonds Are About To Become More Volatile

The report focuses heavily on the future volatility of corporate bonds. Basically, they believe that corporate bond prices are going to become more volatile. Traditionally, primary dealers have cushioned price volatility by taking on bond inventory during periods of falling pricing and selling inventory during rising prices. This is no longer the case, as primary dealers are holding less and less inventory. As a result, they expect corporate bond volatility to rise.

This is in contrast to municipal bonds, which are already less volatile than corporate bonds, and there are no changes on the horizon which should make them more volatile.  Janney’s “Municipal Market Note” (June 4, 2012) focuses on Build America Bonds in particular. They suggest that a recent increase in spreads over treasuries by 25 bps (1/4 percent) since April 2012 may provide a temporary buying opportunity.

 

Breckenridge View: Taxable Bonds Offer Better Returns and Less Volatility

“From 2006 to 2011, intermediate taxable municipals had the lowest standard deviation of monthly returns relative to competing spread products, .  .This should not be a surprise given the high average credit quality of the asset class. What is more notable is that taxable municipals.”

For more on municipal bonds visit the municipal bonds section here at Learn Bonds.

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