With tax season now behind (most of) us, tax-sensitive investors assessing the federally tax-exempt municipal bond market face a richer environment from a valuation perspective. The post-pandemic period has witnessed far more municipal bond demand than net new issue supply, contracting some parts of the after-tax municipal yield curve below that of U.S. Treasury yields.
The Freedom Advisors investment team had an opportunity to meet with JPMorgan Asset Management for an in-depth discussion on the current fixed income landscape. The sector has seen across-the-board narrowing of credit risk premiums (the extra yield above U.S. Treasuries) required by investors to hold debt, including municipal bonds, considered riskier than Treasuries. Granted, a strong economy and fiscal support from the federal government make for a more conducive environment for taking additional credit risk. Investors should be mindful of whether their investments are being properly compensated with yield, including in the municipal market.
Source: JPMorgan Asset Management, Used with Permission
Source: JPMorgan Asset Management, Used with Permission
Fixed income remains attractive on an absolute inflation-adjusted basis, even municipal bonds on a tax-equivalent basis, especially if the U.S. economy experiences a soft landing of slow and steady growth. Advisors should be more deliberate in how they allocate client investments in the municipal bond market.
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Advisory services are offered through Freedom Investment Management Inc. (“Freedom”), a registered investment adviser. Investment strategies carry varying degrees of risk, including the total loss of principal. Freedom does not provide tax or legal advice.
While Freedom believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. This material reflects the opinions of Freedom and is an assessment of the market environment at a specific time. This is not intended to be a forecast of future events or a guarantee of future results.
This should not be considered a recommendation to buy or sell individual securities, nor should this information be relied upon as research or investment advice regarding any security in particular. Diversification does not ensure a profit or protect against loss.
Except as otherwise specifically stated, all information is as of April 24, 2024.