4. For tax-conscious investors (and who isn’t these days?), munis are second to none. Given current muni-to-Treasury ratios, we calculate that high-quality 15-year municipal bonds offer tax-equivalent yields in the area of 7%. And as investors feel the pain of higher taxes on their 2013 returns, we expect the tax-advantaged asset class will earn a few more fans, a boon for performance.
5. Munis remain a high-quality source of income, particularly relative to the corporate bond market. Moody’s noted in July that of the more than 7,500 municipal entities it rates, only 34 are assigned a below-investment-grade rating.
So what does all of this mean? This time last year I was talking about paring risk and playing defense in the muni market in 2013. While volatility is likely to linger in 2014 as investors anxiously anticipate a Fed taper, a rate back-up of the kind we saw in 2013 is highly unlikely. In fact, any such reaction would be viewed as a longer-term opportunity to lock in attractive income in the asset class.
As you embark on a season of list-making and resolutions, we encourage you to look beyond the headlines and consider the advantages of municipal bonds, particularly relative to the taxable alternatives. For additional ideas on preparing your portfolio for the New Year and beyond, be sure to consult our full 2014 Outlook and The List. Happy Holidays to all.
Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog. You can find more of his posts here.