Looking for more yield? Munis yields are still going strong
November 20, 2023
November 20, 2023
If you’ve been looking for a way to help clients in higher tax brackets, now’s the time to tell them about an attractive opportunity in municipal bonds. Tax-equivalent yields on municipal bonds are above 7%, among the highest levels we’ve seen over the past decade.
As an asset class, munis are rated AA–, indicating a greater degree of safety from default risks compared with lower-rated sectors such as investment-grade credit.
While recession forecasts entail risks for many markets, municipal balance sheets are flush with reserves following pandemic-era stimulus, and they should remain healthy even if an economic downturn should unfold.
Given this unique combination, your high-tax-bracket clients should strongly consider increasing their municipal bond allocations.
You can create a plan to help your clients potentially generate tax-exempt income and enhance total returns, while being careful to avoid compromising tax efficiency or portfolio stability.
Here are three key benefits for your clients when investing in Vanguard municipal funds:
1) Strong fundamentals. Buoyed by COVID-era stimulus funds and rising property and wage taxes, many municipalities have set aside money for rainy-day funds and pension obligations. This provides a buffer for municipal bond investors against potential falling tax revenue in a recession.
2) Higher yields relative to other asset classes and to historical norms. Corporate debt yields are about 6%, and their average credit rating is only BBB+, compared with AA– for munis, according to Bloomberg. The volatility that whipsawed municipal securities last year led to bargain valuations, especially at the longer end of the yield curve. Our portfolio managers have also uncovered compelling value in municipal bonds rated A and BBB. We anticipate that these purchases will contribute to outperformance for the next few years.
3) Decades of fund management experience. You and your clients can count on us to leverage our scale and decades of experience managing municipal funds, both active and passive, to generate stronger long-term outcomes:
You’ll find our national tax-exempt funds hold thousands of bonds across sectors, providing significant diversification.
1 Vanguard calculations using Morningstar, Inc., data. Vanguard’s average asset-weighted expense ratio was 0.08% on December 31, 2022, and the industry average asset-weighted expense ratio, excluding Vanguard, was 0.47%.
2 For the five-year period, 12 of 12 municipal fixed income funds exhibited top-quartile performance relative to peer funds in their Lipper categories. For the 10-year period, 12 of 12 municipal fixed income funds exhibited top-quartile performance relative to peer funds in their Lipper categories. Results will vary for other time periods. Only funds with a five-, or 10-year history, respectively, were included in the comparison. Data as of Sept. 30, 2023. Source: Refinitiv. Note the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks.
3 Morningstar, as of December 31, 2022.
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