H&W in the Media

Why Muni Demand Will Continue to Flourish


Bill Walsh, president of Parsippany, N.J.-based broker-dealer and wealth manager Hennion & Walsh, said retail demand in the muni market has been “pretty extraordinary” this year. Investors “favor high quality bonds and can get a better yield after taxes and it gives them a place to invest that is not volatile,” he said in an interview on Friday.

Walsh’s said his clients are shopping around for various maturities, but largely prefer the 15 to 20-year slope where they are getting the best value due to a flat yield curve. Triple-A bonds due in 2031 and 2036 were yielding 1.59% and 1.82% as of Friday, according to MMD.

On a taxable-equivalent basis, for instance, the 2036 maturity offers 94.7% of the Treasury yield, and an after-tax yield of 3.01%.

Analysts expect those factors to keep demand healthy in the third quarter.

“The hunt for yield in the tax-exempt market is a big deal, and with all the low-yielding investments available, municipals stand out to higher bracket investors” for their after-tax returns, Schankel of Janney said Friday.

Investors, he said, are enticed by the idea of getting “more bang for their buck” on municipal investments, at a time when they are frustrated with absolute yields of between zero and 2% on other investments.

Heckman said he recommends a “sweet spot” between 12 and 15 years as having the most value for his clients.
“Buying coupons from 2.5% to 4% are probably the most attractive here, although we like to see some higher coupons with some cushion if the bonds don’t get called, so we are getting compensated for that duration,” Heckman said.

Current demand has been strong enough to outweigh near-historic low yields, Brexit concerns, Puerto Rico’s defaults, and fiscal turmoil in Chicago and Illinois, Colby pointed out.
Those circumstances shouldn’t dampen investor interest going into the third quarter, according to Colby.

“We will continue to have cash come to the market place in the form of coupon payments, maturities, and calls – and also refundings,” he said.

Colby said issuance from states like New York in the second half of the year “certainly will keep interest piqued from investors.” New York State has plans to issue $6.5 billion over the coming three months, up from $1.65 billion in the third quarter of 2015.

Amid volatility in interest-rates, equities and overseas markets, municipals are expected to remain a safe-haven for investors and offer comparable yield incentives at a time when demand is already seasonally high.

“We see demand being strong for the next couple of months, especially with July and August being decent coupon reinvestment months,” Walsh said. “Individual investors are still uneasy with the equity market.”

Uncertainty leads to volatility, Walsh said. “That’s what’s causing people to continue to put money into the tax-free market at such a strong clip,” he said. “They see their [stock] portfolios haven’t done that well,” yet the 2% to 2.5% taxable-equivalent yields on high-quality municipals that his firm’s investors prefer are relatively attractive.

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