The obvious source for positive returns in bonds during 2021’s robust economic recovery is high-yield, or junk, a category always known to piggyback on rollicking growth and booming oil prices.
But as usual, tax-exempt bonds are also in the green.
The numbers for 2021 are not spectacular. For example, a clutch of broad-based municipal indexes is up 0.5% to 1%. (Returns are through June 4.)
Even so, municipals’ prices are not nearly as sensitive to interest-rate bumps as are Treasuries or corporate bonds. There is less trading, and more municipal bondholders stay put until maturity, so the prices are stickier until and unless rates seriously soar.
And the perception now is that high-income investors are due for big income tax increases, so they are frantic for shelters, and tax-free bonds are easy to buy.
But tax-policy talk is always a questionable explanation for municipal bonds’ success.
It seems that many investors just do not want a tax liability when it is optional. It doesn’t matter whether their personal tax rate is low, they live in a tax-haven state, or Congress puts them into a combined 50% state and local bracket.
It also doesn’t matter whether the yield on tax-frees is unusually low compared with what is available from taxable debt — which it is now, with triple-A muni yields at near-record lows relative to 10-year Treasuries. In some asset classes, this would trigger a burst of profit-taking and rebalancing. Not here. Repeat: Folks. Just. Hate. Taxes.