Last Updated: 1/18/2022
2022 was one of the most difficult years for investors since the Great Recession over a decade ago. Throughout the capital markets, damage was widespread. The table below shows the total returns for some of the largest indices:
As 6-7% inflation eroded purchasing power, investors were left to ponder their next move. But this painful market selloff has created fixed-income opportunities that we haven’t seen in many years. 18 months ago, you would have had a difficult time finding investment grade municipal bonds paying yields above 2.00%. Today, high quality tax-free munis are yielding at or above 4.00%. For investors with shorter time horizons and/or more conservative risk tolerances, you can buy 1-month to 2-year Treasuries in the 4.00-4.50% range. Many analysts and advisors who have shunned bonds for over a decade are beginning to notice the asset class again.
If we consider the performance of municipal bonds in the 4th quarter, you’ll see that investors have taken advantage of this higher yield environment. Over the past few months, munis have outpaced gains in the US Treasury market by a decent amount. Let’s take a look at Q4 numbers:
One data point that we track closely to determine municipal bond demand, is the Muni to Treasury (UST) ratio. This is simply the muni yield for a given maturity, divided by the Treasury yield for the same maturity. The ratio can be used along the entire maturity spectrum. The change in the ratio over time is a great way to evaluate muni performance versus Treasury performance along the curve – but the 10-year ratio is typically given the most weight.
At the beginning of Q4, the 10-year muni to UST was 88%, and by the end of the quarter, it dropped to 70%. At the time of this writing, we are now down in the 60’s. From a historical perspective, this ratio is very low and is a great indication of the demand for munis. Investors are taking quick action to lock in higher tax-free yields.
If the last 3 years have shown us anything, it’s that we can’t predict what will happen next in the market. With that being said, we are confident that the fixed-income markets will continue to provide some great investment opportunities in 2023.
Should you have any questions about the markets, specific opportunities, or your portfolio, we highly encourage you to schedule a meeting with your financial advisor today.
VP of Special Projects & Advisor
Vice President & Advisor
All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. There is no assurance any investment strategy will be successful or that a fund will meet its investment objectives. An investment in a mutual fund or exchange–traded fund (ETF) will fluctuate and shares, when sold, may be worth more or less than their original cost. ETFs are subject to risks similar to those of stocks and may yield investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched. Asset allocation does not guarantee a profit or protect against loss. Advisory accounts are not designed for excessively traded or inactive accounts and may not be suitable for all investors. Please carefully review the Amuni Financial advisory disclosure document for a full description of our services, including fees and expenses. The minimum account size for these programs is between $25,000 and $200,000.
For certain Investors, the income from municipal bonds designated AMT may be subject to the Alternative Minimum Tax. Discount bonds may be subject to capital gains tax. Minimum purchase amounts may apply. Not all municipal bonds are free from both state and federal taxes. If bonds are insured, no representation is made as to the insurer’s ability to meet its commitments. Insurance does not remove market or safety risk. All bond ratings are from S&P or Moodys and may be under review for possible downgrade. Bond offering yields include calculations which are the lower of the yield to maturity or the yield to call. Underlying ratings are assigned by a rating agency to such security without regard to credit enhancement or assigned to other securities of the same issuer having the same features and security structure but without credit enhancement. Please consult your Registered Representative to determine the appropriateness of investing in these or other securities. Additional municipal trade price information and disclosure documents are available on the MSRB’s Electronic Municipal Market Access (EMMA) system (http://emma.msrb.org/).
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Amuni Financial, Inc.
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