Municipal Bonds Rebound Strongly in October — But Opportunities Remain
What a difference a month makes!
Following September’s historic global bond sell-off, municipal bonds staged a very strong recovery in October. With prices rising sharply as investors took advantage of some of the most attractive tax-free yields we’ve seen in years.
When municipal bond yields reached 5% and even higher in September, we believed it represented an extraordinary opportunity for investors looking for long-term, consistent, tax-exempt income. Depending on an investor’s tax bracket, a 5% tax-free yield could represent the equivalent of earning 8%, 9%, or even 10% on a taxable investment.
And investors responded.
Demand for municipal bonds increased, while a slowdown in new bond issuance helped support the market. The result was a significant rebound in bond prices throughout October, with that positive momentum appearing to continue into early November.
Of course, we continue to monitor inflation, Federal Reserve policy, and geopolitical developments, all of which can influence bond prices. But the September sell-off created opportunities, and investors clearly took advantage of them.
The good news? We believe opportunities still exist.
Even after October’s rally, municipal bond prices have not fully recovered to where they were just a few months ago. Depending on maturity and credit quality, investors can still find attractive tax-free yields approaching 5%.
But as we approach the final two months of the year, there’s another opportunity that municipal bond investors should be considering.
Year-End Tax-Loss Harvesting
With equity markets having performed well, many investors may be sitting on realized capital gains in their portfolios. And with year-end approaching, tax-loss harvesting becomes an important consideration.
For municipal bond investors, one strategy worth exploring is something we call a municipal bond tax swap.
The concept is actually pretty simple.
Let’s say you own municipal bonds that have declined in market value since you purchased them. You may be able to sell those bonds, realize a capital loss, and simultaneously reinvest the proceeds into different municipal bonds trading at today’s market prices.
The objective is to remain invested in the municipal bond market, continue receiving attractive tax-exempt income, and potentially use the realized loss to offset capital gains elsewhere in your portfolio.
Here’s a simple hypothetical example.
Suppose you own $100,000 face value of New York City municipal bonds with a 4 5/8th coupon, maturing in 20 years. You originally purchased those bonds at par, but today they’re trading at approximately 97 cents on the dollar.
Selling these bonds for approximately $97,000 would realize a $3,000 capital loss.
You could then take that $97,000 and purchase a different municipal bond, perhaps a New York State Thruway bond with a 4.75% coupon maturing in 35 years also trading around 97 cents on the dollar.
In this hypothetical example, you would still own $100,000 face value of municipal bonds with a longer maturity date and continued tax-exempt income. In fact, your annual coupon income would increase, although the overall investment characteristics would need to be evaluated.
Most importantly, you would have realized a $3,000 capital loss that could potentially be used to offset capital gains elsewhere in your portfolio.
That’s the beauty of a properly executed municipal bond tax swap.
You’re not necessarily changing your long-term investment philosophy. You’re still investing for consistent, predictable tax-free income and the return of principal at maturity, assuming the issuer meets its obligations.
You’re simply taking advantage of current market conditions to potentially improve your overall tax position.
And unlike selling a stock and waiting to repurchase that same stock, municipal bond investors may be able to immediately reinvest in a different, appropriately selected bond without triggering the wash-sale rules.
Of course, every situation is different, and investors should consult their tax advisors before implementing any tax-loss harvesting strategy.
Now Is the Time to Get a Second Opinion
At Hennion & Walsh, we’ve always believed that municipal bonds should be viewed as long-term investments, providing consistent tax-exempt income and the return of principal at maturity.
That philosophy hasn’t changed.
We also believe the opportunity created by September’s market decline and the potential tax advantages available to investors as we approach year-end.
If you own municipal bonds today, whether they’re held here at Hennion & Walsh or at another financial institution, we encourage you to take a closer look at your portfolio.
Our municipal bond specialists would be happy to review your existing holdings and identify potential tax-loss harvesting opportunities.
Simply send us a copy of your investment account statements. We’ll provide a complimentary, no-obligation second opinion analysis and help you determine whether a municipal bond tax swap might make sense for your portfolio.
As always, our team here at Hennion & Walsh is available to help you navigate the municipal bond market and take advantage of opportunities as they arise.
The Hennion & Walsh experience- let’s do it
Disclosure:
Advisory Services provided by Hennion & Walsh Asset Management…
Securities Offered by Hennion & Walsh, Inc. Member FINRA/SIPC…
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