Download MIDYEAR UPDATE: Do Municipal Bonds Make Sense for You?

MIDYEAR UPDATE: Do Municipal Bonds Make Sense for You?
With David Litvack, Head of Tax Exempt Research, U.S. Trust
Please see important information at the end of this program
Recorded July 14, 2016
Mr. LITVACK: I’m David Litvack, head of Tax Exempt Research, and I’m here to tell
you about our outlook for municipal bonds in the second half.
For the first half, we saw municipal bonds perform really well. Demand has been very
strong, from investors looking for tax-exempt income. And supply of municipal bonds
has been relatively limited.
So as a result, we’ve seen yields come down and municipal bond performance strong
for the first half, both in investment-grade munis, as well as high-yield munis.
Fundamentally, we’re pretty optimistic on municipal credit. However, there are three
areas where we have concerns, and we’re watching, public pensions, oil-producing
states, and of course, Puerto Rico.
On pensions, we’re concerned because over the last 10 or 15 years, public pensions in
the United States have actually deteriorated quite alarmingly. We’re concerned about
Illinois, Kentucky, and New Jersey, amongst some others.
On oil, we’re concerned about the price decline over the last two years, and the impact
that’s had on certain states, mostly Alaska, North Dakota, Louisiana, and Oklahoma.
With regards to Puerto Rico, Puerto Rico has been undergoing some severe economic
and fiscal contraction, over the last 10 or 15 years. On July 1, Puerto Rico defaulted
on about $1 billion worth of debt.
Congress has been watching this with great concern. And they passed, a law that puts
in place a financial control board on Puerto Rico, and also gives them a stay on credit
litigation. And that’s designed to help them get their financial house in order.
However, we’re still concerned about Puerto Rico bonds, and we’ll know more about
how Puerto Rico’s prospects will go, as we see that process unfold over the next few
months.
In summary, we’re positive on municipal bonds as a prudent investment for taxsensitive investors, although we do advise investors to stay high quality and avoid
going down the credit spectrum, in search of yield.
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