Municipal bonds are typically exempt from federal income tax, making them a preferred choice among investors over other debt instruments, particularly among investors in higher tax brackets. Supported by favorable supply and demand dynamics, municipal bonds are performing well this year, with no expected signs of slowing down.
To learn more about why municipal bonds can be a good investment play, U.S. News & World Report recently spoke to Ashfield Capital Partners Portfolio Manager Lyman Howard.
“The municipal bond market first saw demand from people seeking tax-free income. Now additional demand comes from investors rebalancing out of expensive stocks after more than a decade of a bull market. International investors seek the higher U.S. yields versus other parts of the world,” says Howard.
Prices of municipal bonds surged this year due to strong demand, historically low global interest rates and little new supply. However, Howard explains in U.S. News & World Report that they are worth the higher price. “There is north of $10 trillion globally [in bonds] that yields zero percent or less,” explains Howard. As a result, the current 10-year Treasury yield of 1.8% is certainly appealing to investors worldwide. The only downside he sees is that there are no municipal bond bargains, and that likely won’t change. “You kind of have to hold your nose and just buy there,” says Howard.
On a closing note, Howard tells that publication that he is sticking with higher-quality bonds for his clients, even if it produces a lower yield. “The reason to own municipals is for safety, stability of cash flows, portfolio balance and to earn a rate of returns that doesn’t impact your taxable income,” he says. “For that reason, we’re not trying to shoot out the lights on riskier munis.”
To read the entire U.S. News & World Report article, click here.
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