The plain supply for constructive returns in bonds throughout 2021’s strong financial restoration is high-yield, or junk, a class at all times identified to piggyback on rollicking development and booming oil costs.
However as common, tax-exempt bonds are additionally within the inexperienced.
The numbers for 2021 are usually not spectacular. For instance, a clutch of broad-based municipal indexes is up 0.5% to 1%. (Returns are by June 4.)
Even so, municipals’ costs are usually not practically as delicate to interest-rate bumps as are Treasuries or company bonds. There’s much less buying and selling, and extra municipal bondholders keep put till maturity, so the costs are stickier till and except charges critically soar.
And the notion now could be that high-income buyers are due for giant revenue tax will increase, so they’re frantic for shelters, and tax-free bonds are straightforward to purchase.
However tax-policy discuss is at all times a questionable clarification for municipal bonds’ success.
Plainly many buyers simply are not looking for a tax legal responsibility when it’s non-compulsory. It doesn’t matter whether or not their private tax fee is low, they stay in a tax-haven state, or Congress places them right into a mixed 50% state and native bracket.
It additionally doesn’t matter whether or not the yield on tax-frees is unusually low in contrast with what is offered from taxable debt — which it’s now, with triple-A muni yields at near-record lows relative to 10-year Treasuries. In some asset lessons, this might set off a burst of profit-taking and rebalancing. Not right here. Repeat: People. Simply. Hate. Taxes.