Short term treasury yields have risen to levels too high for wealth managers to ignore. Maybe that’s why they are ignoring municipal bonds instead.
Treasury yields from one month through 2 years up the curve have eclipsed 5% at last check thanks to the past year’s steady diet of Federal Reserve rate hikes. A one year Treasury Bill, for example, is now yielding 5.4%, up over a percentage point from a year ago and five full percentage points from two years ago.
With that kind of return so available, liquid and risk free, it’s not hard to understand why financial advisors are funneling excess client money into good old government bonds. The wealth management mantra used to be ‘TINA’, as in ‘there is no alternative’ to stocks. Now it’s hard for advisors to take their eyes off Treasuries – at least for the so-called safe part of their client portfolios – and seemingly at the expense of municipal bonds.
“I’m not investing in individual muni bonds. With Treasury Bills rates so attractive, and interest being state tax free, I’m riding this wave as long as possible,” said Catherine Valega, wealth consultant at Green Bee Advisory.
Scott Bishop, partner at Presidio Wealth Partners, is also not adding to municipal bonds at this time.
“While it can make sense for those at the highest tax brackets, I believe rates have not yet topped out so I am favoring under one-year T-Bills at this time. They have no credit or duration risk. And from my perspective we still may have a recession or a short-term Federal Government shut down, and I think it’s good to play it very low risk for our ‘safe money’ basket, or in other words, bonds,” said Bishop.
That being said, Bishop does plan to look for opportunities to increase duration, and credit exposure to client bond portfolios over the next 12 months. But for now, he says he is “just not there yet given that we are getting paid over 5% pretax in risk-free T bills.”
Despite all the market exuberance for Treasuries, Jonathan Mondillo, head of North American fixed income at abrdn, says the real bargain is on the municipal bond side, especially due to the huge amount of bonds Uncle Sam is expected to sell in coming months to keep the government up and running.
“I think when you look at relative value on a taxable equivalent basis, we like municipalities relative to the US Treasury. I think especially when you look at the amount of issuance that’s expected in the next 12 months with roughly a third of marketable securities coming due, we tend to think that yields in the Treasury market are going to remain elevated and you should continue to see outperformance in the municipal bond market as a result,” said Mondillo.
Mondillo maintains it is a “headscratcher” as to why market participants are ignoring the opportunities in municipal bonds. In his view, municipalities are generally in great fiscal shape should a recession hit later this year of next, and have less – believe it or not – political risk than Treasuries. Fitch Ratings decided to strip the U.S. of its triple-A credit rating this summer due to repeated threats of government shutdowns.
“I think the benefits of the municipal bond market relative to certainly the equity market, certainly the corporate credit market, is that fundamentals are historically strong. Rainy day balances are at or near record levels, levels across the United States. So entering any recession area environment, any economic slowdown, they should benefit from that,” said Mondillo, adding that municipal bonds historically see the downgrades that one would see “almost instantaneously in the corporate credit market.”
MUNIS STILL MAGNIFICENT
Suffice to say that simply because Treasuries have suddenly become the belle of the bond-buyers’ ball, wealth managers have not totally turned their backs on municipal bonds. The tax-free darlings remain an important part of any advisor’s arsenal, especially for high-net worth clients in high-tax rate states.
“We are adding munis to taxable accounts and we always suggest municipals for higher income earners because of their tax treatment, exemption from federal taxes, and if the investor lives in the same state where the bond is issued the muni is often exempt from state taxes too,” said Dean Tsantes, certified financial planner at VLP Financial Advisors.
Tsantes prefers using municipal bond funds for high-earning clients who may need short-term access to their money. So does Steve Stanganelli, financial advisor with Clear View Wealth Advisors, who generally limits individual municipal bond issues to clients who have well over $100,000 to invest in the asset class.
“Right now, I’ve been holding a fairly steady allocation in munis,” said Stangelli. “For clients who live in high tax taxes like California or have taxable income projected to be above $1 million in Massachusetts, I’ll advise them to increase their holdings to muni bond funds as a way to be more tax efficient while also adding to their diversification.”