Even In A Low-Yield Environment, Municipal Bonds May Nudge Out Other Taxable Assets

Despite record-low yields and growing concerns about the health of many U.S. local governments, Citi analyst Vikram Rai believes investors should still be buying municipal bonds. According to Rai, the situation is far from ideal, but municipal bonds offer advantages over other fixed-income investments that make them worthwhile.

U.S. municipal bonds can provide tax-exemptions for qualified investors and alternatives for foreign investors trying to escape negative yielding local debt.

Rai admits that at first glance, the risk/reward balance of many municipal bonds at current yields doesn’t seem very compelling. However, Citi sees no catalyst for higher yields or steeper curves.

Rai sees a potential pension crisis ahead for many municipalities, but he believes investors have gotten prematurely spooked by recent headlines. He added that being right too early can be the same as being wrong.

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“The pension story is a slow paced tragic tale and in most cases the risk of non-payment is far from imminent,” he explained.

He admitted there is plenty of headline risk in the months ahead, which could lead to short, painful yield spikes. Risks include mutual fund outflows, hawkish Federal Reserve decisions and the 2016 presidential election.

So far this year, the iShares S&P Natnl AMT – Free Munpl Bd Fd MUB is up 2.9 percent.

Disclosure: The author holds no position in the stocks mentioned.