Fixed income markets should anticipate a rise in taxable municipal issuance in 2020. Taxable and non-taxable investors alike are beginning to find that municipal bonds may be able to offer a greater benefit to their overall portfolio.
This includes their potential to offer a differentiated source of total return and greater diversification given the sector’s relatively low correlation to other higher-risk fixed income sectors.
Taxable municipal fixed income has more recently attracted global investors due to its high level of current income from vitally essential ‘brick-and-mortar’ projects. Global demand for taxable municipals continues to rise given the scarcity of high quality global assets with an attractive yield.
Overseas investors also favour the fundamentally strong credit characteristics associated with the taxable municipal fixed income space. For instance, when comparing the default level for municipals versus global corporate credit, historical figures show a significantly lower level of credit default for municipal fixed income compared to global corporate credit.
We believe taxable municipals should inherently benefit from increased global market acceptance for the asset class in a higher supply environment. Improved supply is a further catalyst for overseas demand as taxable municipals secure a larger position in investment universes for benchmark-driven investors looking to meet investment liabilities.
Sherri Tilley, investment strategist, Mellon.