Municipal Bonds: How Could They React If The U.S. Economy Slows Down?

Oct. 05, 2022 9:28 PM ETCMF, PWZ, FCAL, MINN, MUB, FMB, OVM, MUNI, VTEB, FLMI, MMIT, MMIN, HMOP, TAXF, MUST, IBMO, IBMP, JMUB, MBND, AVMU, INMU, RTAI, TFI, PZA, ITM, MLN, XMPT, RVNU, FLMB, MAAX, IBMQ, SHM, PVI, SMB, SUB, SMMU, MEAR, FUMB, FSMB, JMST, NYF, FMNY, PZT, IBMK, IBML, IBMM, IBMN, BSMM, BSMN, BSMO, BSMP, BSMQ, BSMR, BSMS, BSMT
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Summary

  • Despite the recent interest rate volatility, municipals have managed to do better than taxable bonds.
  • Municipals have the same default rate as AAA-rated corporates.
  • Adjusting for duration, municipals’ taxable equivalent yield is still superior.
  • Municipals’ compelling taxable equivalent yield makes them worthy of consideration given the prospect of further interest rate increases driven by Fed policy.

Cityscape With Shallow Focus, Long Exposure Look

DKosig/E+ via Getty Images

When we last wrote about municipal bonds, we noted that within the broader fixed income opportunity set, we considered tax-exempt municipals to be more attractive than their taxable bond counterparts, due in part to their solid fundamental

FOMC dot plot - median

Source: Summary of Economic Projects

bar chart: Quarterly state & local tax revenues (1Q2000 through 2Q2022)

Source: Census.gov

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