July 01, 2019
Over the trailing 5-year period, as seen in the chart below, high yield municipal bonds were the strongest-performing fixed income asset class, with a 6.1% return. Its taxable-equivalent return* was even more attractive at 10.5%. On a tax-adjusted basis, investment grade municipal bonds were the second-strongest performer of the fixed income indices represented below.
High yield municipal bonds: Historical strong performer
Annualized total returns (%), 5 years ending March 31, 2019
Source: J.P. Morgan and Bloomberg.
*Taxable-equivalent returns are calculated after grossing up the coupon return by the top tax rate.
Ex-US investors may not benefit from potential tax advantages associated with investing in US municipal bonds. High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.
Annualized returns are represented by the following indices - HY Muni: Bloomberg Barclays High-Yield Municipal Bond Index; IG Muni: Bloomberg Barclays Municipal Bond Index; Taxable Muni: Bloomberg Barclays Taxable Municipal Bond Index; HY Corp: Bloomberg Barclays US Corporate High Yield Index; IG Corp: Bloomberg Barclays US Corporate Investment Grade Index; US Aggregate: Bloomberg Barclays US Aggregate Index; US MBS: Bloomberg Barclays US Mortgage-Backed Securities (MBS) Index; US Treasury: Bloomberg Barclays US Treasury Index; US Agency: Bloomberg Barclays US Agency Index; US ABS: Bloomberg Barclays US Fixed-Rate Asset-Backed Securities (ABS) Index; US Treasury Bills: Bloomberg Barclays US Treasury Bills; Treasurys: Bloomberg Barclays Global Agg Treasuries Total Return Index Value Unhedged USD.
What this means for investors
Of course past performance is no guarantee of future results, but its our view that moving into the second half of 2019, the outlook for municipal bond investing seems positive. Interest rates are relatively stable, credit fundamentals are solid, and effective tax rates for many investors have increased, prompting some investors to look for tax-efficient income solutions. For tax-efficient, long-term growth and income potential, it may be prudent to consider the power of municipal bonds.