Municipal bonds offer a “triple threat” of benefits as tax exemption risks fade – Wells Fargo

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Wells Fargo Investment strategists have upgraded municipal bonds (NYSEARCA:TFI [https://seekingalpha.com/symbol/TFI]), (BATS:ITM [https://seekingalpha.com/symbol/ITM]), (BATS:MLN [https://seekingalpha.com/symbol/MLN]), (NYSEARCA:SHM [https://seekingalpha.com/symbol/SHM]) to “favorable” from “neutral,” citing their unique combination of stability, attractive yields, and tax advantages.

Risks to the elimination of the municipal-bond tax exemption are receding, making this an opportune time for investors to consider these securities, said Brian Rehling, head of Global Fixed Income Strategy at Wells Fargo Investment Institute. “We believe municipal bonds currently offer investors an attractive entry point.”

Muni bonds (NYSEARCA:TFI [https://seekingalpha.com/symbol/TFI]), (BATS:ITM [https://seekingalpha.com/symbol/ITM]), (BATS:MLN [https://seekingalpha.com/symbol/MLN]), (NYSEARCA:SHM [https://seekingalpha.com/symbol/SHM]), which are debt instruments issued by state and local governments to fund essential projects like schools and infrastructure, maintain their appeal largely due to their tax-exempt status. While there had been speculation that Congress might remove the municipal tax exemption as part of a spending reconciliation bill, this possibility is “extremely low,” said Rehling. This reassurance has contributed to renewed investor confidence in the municipal bond market.

The credit stability of municipal bonds represents another significant advantage for investors. Because these securities are backed by the taxing power of state and local governments, they have demonstrated impressive reliability with investment-rated general obligation bonds and essential-service revenue bonds showing a five-year cumulative historical default rate of less than 0.05% since the 1970s.

“Compare this with corporate bonds, where defaults are more frequent and downgrades can feel like navigating a minefield at times,” Rehling added.

Rising U.S. Treasury yields (US10Y [https://seekingalpha.com/symbol/US10Y]), (US2Y [https://seekingalpha.com/symbol/US2Y]), (US5Y [https://seekingalpha.com/symbol/US5Y]) have created an environment of higher yields across the bond market, making municipal securities particularly attractive for income-oriented investors.

As of May 21, 10-year AA-rated munis are yielding around 3.5%, a significant increase from the 1% yields of recent years. This yield improvement is “a big reason we upgraded our guidance on municipal bonds on May 15, to favorable from neutral,” Rehling said.

However, he warned that municipal bond prices will fluctuate as interest rates change, especially for longer-dated maturities. Interest rates will be “flat to lower in the year ahead,” but with a volatile path getting there, he added.

For better credit stability, Rehling recommended that investors “stick to higher-rated general obligation and essential-service revenue securities.”

MORE ON SPDR SERIES TRUST - SPDR NUVEEN BLOOMBERG BARCLAYS MUNICIPAL BOND ETF:

* Muni bonds have a buying opportunity amid tax exemption concerns – Wells Fargo [https://seekingalpha.com/news/4450586-muni-bonds-have-a-buying-opportunity-amid-tax-exemption-concerns-wells-fargo]
* Seeking Alpha’s Quant Rating on SPDR Series Trust - SPDR Nuveen Bloomberg Barclays Municipal Bond ETF [https://seekingalpha.com/symbol/TFI/ratings/quant-ratings]
* Dividend scorecard for SPDR Series Trust - SPDR Nuveen Bloomberg Barclays Municipal Bond ETF [https://seekingalpha.com/symbol/TFI/dividends/scorecard]