Hi, I'm Ann Ferentino, a Portfolio Manager and Credit Analyst at Federated Investors.
Why are munis attractive now?
Munis are attractive for many reasons, of course the main reason is because the income is tax exempt, however, there's also many other reasons to own munis, especially in a market with elevated volatility, like we're seeing today. Municipals are, a less volatile domestic asset class. According to Bloomberg Barclays, if you were to look at the annualized returns, tax adjusted returns from munis over the past ten years, on a risk adjusted basis, you are going to see that munis tax adjusted returns are higher with less risk. Municipals have a robust credit history. Since the demise of the AAA Muni Bond insurers in 2008, the municipal market has really become a credit market. However, it's a safer, less risky credit market, relative to comparably rated corporate bonds. If you look at the default rates, at each level of the credit quality spectrum, you're going to see that they're significantly lower compared to corporate bonds. When you have volatility in a stock market, like we do today, and you're looking for a way to reduce your risk, you want to consider adding municipal bonds, because by adding municipal bonds, you are going to reduce your risk but increase your return profile. Why is that? Because when you are trying to reduce risk in a balanced portfolio you want to combine two asset classes that have a low correlation. The correlation between municipal bonds and equities is just about zero.
Views are as of Dec. 7, 2018, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. Income from municipal securities may be subject to the federal Alternative Minimum Tax (AMT) and state and local taxes. Indexes are unmanaged and an investor cannot invest in a index. Diversification does not guarantee a profit nor protect against loss. Federated Investment Management Company 18-76995 (12/18)