With trillions of dollars of negative-yielding debt globally, we believe taxable municipal bonds deserve close attention from investors seeking long-duration, high-quality fixed income with spread. When most investors think of the U.S. municipal marketplace, they tend to focus on tax-exempt munis that appeal to U.S.-based investors seeking safety of principal and tax-efficient income. While tax-exempt bonds comprise the bulk of debt outstanding in the muni market, recent changes in the U.S. tax code have led to rapidly growing issuance of taxable muni bonds. With around $600 billion of taxable munis now outstanding, and annual issuance topping $100 billion in recent years, the taxable market is now attracting significant investment from overseas institutional investors.
Taxable munis offer a range of benefits for certain investors, in particular insurance companies. The muni market is very high quality, with over 80% of its debt rated single A or better. Like corporate bonds, taxable munis trade at a spread over Treasuries. Currently, full market investment grade taxable munis have an OAS that is in line with the U.S. investment grade corporate bond market while providing a much higher average rating (AA- vs. A-).1
The muni market has thousands of unique issuers scattered across 50 states, which provides diversification benefits at the issuer, sector and geographic level. Taxable municipals tend to be a longer-duration asset class, as evidenced by the Bloomberg Barclays taxable muni index, which currently has a duration of roughly 10 years. Finally, many muni bond issues finance infrastructure-related investments that can have real value for certain insurance company investors.
With $13 trillion of negative-yielding debt globally, we believe the taxable muni market deserves the attention of investors because of its compelling spread over Treasuries. High ratings and lower historical default rates in every rating category when compared to U.S. corporate bonds only increase the appeal of taxable munis. With the U.S. economy growing above trend and with substantial fiscal support having flowed to the major sectors of the municipal market, credit trends have turned positive. Moreover, with the muni market’s recent growth in issuance, investors can now confidently deploy capital at scale in the sector.
For more on this topic, read our Taxable Munis flyer