Municipal bonds

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Compelling Yields and high credit quality

Municipal bonds can offer comparable yields to investment grade corporate credit, while typically exhibiting higher credit ratings and lower historical default rates. They can therefore offer attractive diversification benefits alongside potential for returns.

Access to higher credit quality with comparable yields to corporate bonds

Aggregate credit rating of AA and a long-term average default rate of just 0.09% versus 2.2% for global investment grade credit, with higher recovery rates¹.

Greater credit resilience

The quasi-public nature of municipal bonds has resulted in significantly lower historical default rates² and higher recovery rates than global corporate bonds.³

Opportunities for higher risk-adjusted returns: Taxable munis provide diversification benefits in a fixed income portfolio based on correlations.⁴

What are municipal bonds?

US municipal bonds are issued by US state and local governments, and non-profit entities to fund public infrastructure initiatives.

General obligation (GO) bonds

General obligation bonds are funded by a municipality’s full faith and creditworthiness. The GO market is around $500bn in size and is the most popular segment of the municipal bond market. We believe an active approach can add value if an investor can access large, dedicated municipal bond credit analyst teams.

Revenue bonds

The $1.1trn revenue bond market is harder to analyze results and is less efficient, potentially providing opportunities for active managers. In our view, around ~80% of a municipal bond allocation should be tilted toward revenue bonds. We believe investors need to partner with a skilled and well-resourced active municipal bond manager capable of analyzing diverse municipal credits across the large universe of revenue bonds.

Taxable municipal bonds

A smaller but rapidly growing sub-set of the overall municipal bond market, provide income and yields which are often greater than similarly rated corporate bonds in the US and globally. This is particularly attractive to non-US investors. Given inefficiencies in market pricing, this at times opens up potential relative value opportunities across the taxable and tax-exempt markets.

Tax-exempt municipal bonds

Can be an attractive tax-efficient investment vehicle for US individual and corporate investors as the coupon interest income paid by these bonds is exempt from federal, and in many cases, state income taxes. While non-US investors would not benefit from the tax relief, these bonds can offer diversification benefits.

Why Insight for munis?

Strategies

Highly experienced dedicated municipal bond team

Highly experienced team exploits opportunities in a fragmented market. Detailed credit analysis by a specialist team is required to assess the unique risks and characteristics of a diverse array of underlying infrastructure assets. ⁵