Municipals versus Corporate Bonds

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The relative value of Municipals versus Corporate Bonds in a rising rate environment is now high on the research agenda of many professional investors.

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Compelling Reasons to Invest in Municipal Bonds Today.

With Municipal Bonds trading at attractive valuations, higher yields versus treasuries, together with strong credit fundamentals, renewed dialogue between Professional Investors and Municipal Bond investment managers is taking place.

The attractive valuations of Municipal bond can be attributed to nearly $60 billion in outflows year-to-date through May 25. And is most noticeable amongst the most liquid segments of the market, including both the 10 year AAA bonds and the well known High Yield names.

Looking back historically, Municipal Bonds often exhibit large net outflows during uncertainty. Today's situation runs parallel to the extreme outflow periods during  the Global Financial Crisis, Municipal Bond Scare, the last US Election, and now the COVID period. What exacerbates the situation today is the reality of rising rates.

But what is supporting the investment case for Municipal Bonds today?

1. Tax Revenue Collection - A year-on-year increase of 22% (2021 versus 2022) has resulted in a 19% increase on pre-pandemic levels.

2. Protection against Lower Growth - With consensus growth estimates now being revised downwards, investors are looking at historical default rates and down-grade trajectories during past recessions. The historical metrics suggest a relatively better picture for municipal bonds versus corporates.

3. Thematic - The attractiveness  of exposure to either short duration high yield or stable income generated by essential infrastructure projects, bodes well for today's portfolio priorities.

And whilst recession may bring financial headwinds to certain sectors, such as higher education, the 7.6% decrease in the first five months of 2022, take Municipal bonds to their cheapest levels since late 2020. The relative value of Municipals versus Corporate Bonds in a rising rate environment is now high on the research agenda of many professional investors

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