Overlook municipal bonds at the peril of your portfolio.
- They must be researched carefully but represent an important portion of a well-diversified portfolio, providing value for both taxable and tax-exempt investors
- Municipal and state credit are still healthy overall, and benefit from liquidity and other supportive measures from the Federal Reserve and Uncle Sam
- In our view, they are poised to prosper regardless of who wins on Election Day in November
These are the times that try investors’ souls. In the wake of the COVID-19-induced plunge in capital markets, the term “safe haven” has gone by the wayside. Still, there remains a historic buying opportunity for investors who know where to look—and we are looking mightily at investment-grade municipal bonds.
In a normal (pre-COVID-19) world, stocks do not move in lockstep with bonds—the latter of which are often relied upon to offset volatility in the former. In this “Bizarro World,” however, the standard rules don’t apply. The bond markets—just as panic-driven as the stock market—have seen a broad selloff. We believe high-quality, or investment-grade (IG), municipal bonds have been indiscriminately sold, effectively tossing out the baby with the bathwater. To that we say, not so fast. In fact, the current market volatility has created a historic buying opportunity within the municipal bond market.
First, let’s take a quick look at the recent lay of the land. Mutual funds and other investors have recently been forced to sell their highest-quality and most-liquid assets to meet redemptions and margin calls. In many cases, that means high-quality general obligation municipal bonds or those backed by Treasuries have been sold in large quantities and are seeing historic spreads between buyers’ bids and sellers’ asking prices. The selloff grabbed the attention of bargain-hunting retail as well as institutional investors, such as Asian insurers, that jumped in and then out again to grab safe yield at “sale” prices. Even before the dust has settled, there are a number of reasons to consider IG munis as an important part of a well-diversified portfolio.
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