Source: Bloomberg Barclays and Morningstar as of 6/3/21. Tax-equivalent yield is based on an equally weighted national average federal and state (top bracket) income tax rate for single filers (37% federal, plus 3.8% net investment income tax, plus 6.31% state average), and volatility is represented by standard deviation over the 5-year period ending 5/31/21. Short-term corporate bonds are represented by BBgBarc US Corp 1-3 Yr TR USD; Short-term government bonds are represented by BBgBarc US Govt 1-3 Yr TR USD. Yields are yield to worst. Risk is represented by standard deviation. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index.
So, what exactly does all of this mean for investors going forward? Well, first and foremost, it is clear that investors should be giving more consideration to short-term municipal bonds as a solution for stepping out of cash. Yields on certificates of deposit and money market accounts and funds are near zero and the typical asset classes for the job (i.e., short-term taxable bond sectors) currently lack the risk-return balance that investors may want in this type of allocation.
Short-term municipal bonds, however, provide high credit quality with lower credit risk compared to taxable corporate bonds. We continue to believe that municipal bonds should be part of a diversified asset allocation, and that the current environment has made active management more important than ever. By taking advantage of the price weaknesses, rate changes and market dislocations, active muni bond managers remain best positioned to outperform during these extraordinary market conditions.
1. Board of Governors of the Federal Reserve System (US), Households; Checkable Deposits and Currency; Asset, Level [BOGZ1FL193020005Q], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BOGZ1FL193020005Q, June 3, 2021.
3. Source: Morningstar Direct as of 4/30/21
4. Board of Governors of the Federal Reserve System (US), Money Market Funds; Total Financial Assets, Level [MMMFFAQ027S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MMMFFAQ027S, June 3, 2021.
6. Short-term municipals represented by Bloomberg Barclays Municipal 3-Year Index. Tax-adjusted return based on an equally weighted national average federal and state (top bracket) income tax rate for single filers (37% federal, plus 3.8% net investment income tax, plus 6.31% state average).
7. Source: Moody’s US Municipal Bond Defaults and Recoveries, 1970-2019.
8. Source: Moody’s US Municipal Bond Defaults and Recoveries, 1970-2019.
9. Short-term municipals: Bloomberg Barclays Municipal 3-Year Index; short-term corporates: Bloomberg Barclays U.S. Corporate 1-3 Year Index; short-term government: Bloomberg Barclays U.S. Government 1-3 Year Index. Volatility is represented by 5-year standard deviation from May 31, 2016 – May 31, 2021. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index.
Credit Ratings: Moody’s rates borrowers on a scale from Aaa through C. Aaa through Baa3 represent investment grade, while Ba1 through C represent non-investment grade. Standard & Poor’s rates borrowers on a scale from AAA to D. AAA through BBB represent investment grade, while BB through D represent non-investment grade. Fitch rates borrowers on a scale from AAA to D. AAA to BBB represent investment grade, while BB through D represent non-investment grade.
Standard deviation measures how widely dispersed returns have been over a specific period of time. A high standard deviation indicates that the range is wide, implying greater potential for volatility.
Tax-equivalent yield is the yield that would be required on a taxable security to provide the same yield after taxes as is provided by a tax-exempt municipal bond. The higher a person’s tax bracket is, the higher the tax-equivalent yield will be. Tax-equivalent yield is often used when evaluating municipal bonds.
Yield to Worst: An estimate of the lowest yield that you can expect to earn from a bond when holding to maturity, absent a default. It is a measure that is used in place of yield to maturity with callable bonds. As callable bonds can be bought back before their stated maturity date, yield to maturity does not provide an accurate picture of what an investor can expect to earn.
Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity. Interest income on these securities is exempt from state and local taxes.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
Municipal bond risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers, and the possibility of future tax and legislative changes, which could affect the market for and value of municipal securities. A portion of a fund’s income may be subject to state and local taxes or the alternative minimum tax. Income from municipal bonds held by a fund could be declared taxable because of unfavorable changes in tax law, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. High-yield municipal bonds may be subject to increased liquidity risk as compared to other high-yield debt securities. Bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner.
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