Main financial assets discussed: Municipal bonds, Treasury securities
Top 3 key points:
1. The breakeven tax rate for municipal bonds has increased, making taxable bonds more attractive for most investors.
2. Municipal bonds are more favorable for investors in higher tax brackets, particularly at the long end of the yield curve.
3. Municipal bonds have certain tax disadvantages, such as state income tax and the alternative minimum tax, which investors need to consider.
Recommended actions: **Sell** municipal bonds and **buy** taxable bonds for most investors, especially those in lower tax brackets. Consider holding municipal bonds at the long end of the yield curve for investors in higher tax brackets. Seek professional management for municipal bond strategies.
Prominent money managers who bet on government bonds in anticipation of a recession in the US are now facing subpar returns as Treasury yields reach a 15-year high, although some remain firm in their strategy and continue to buy dips in bond prices.
US bond-market selloff continues as resilient economy prompts investors to anticipate elevated interest rates even after the Federal Reserve finishes its hikes, leading to a 16-year high in 10-year yields and increased inflation expectations.
Bond selling has driven 10-year Treasury yields to 16-year highs, possibly due to the timing of the Bank of Japan's signal to allow higher yields and speculation on the upcoming Federal Reserve symposium, with implications for risk appetite and a focus on Fed Chair Jerome Powell's Jackson Hole speech.
Investors are flocking to money market funds as a safe alternative to buying stocks or bonds, with the record high net assets of these funds potentially fueling a year-end stock market rally, according to Bank of America.
Approximately 1,500 high-grade corporate bonds issued by well-known companies such as Apple, Microsoft, Alphabet, Disney, and Comcast are currently trading at a discount of 50 to 80 cents on the dollar, providing investors with the opportunity to pursue attractive returns.
The recent selloff in bond markets has led to higher yields and the breaking of key levels, indicating a potentially new normal of higher interest rates with implications for mortgages, loans, credit cards, and the global economy as a whole.
A bond sell-off is driving up government borrowing costs as the financial markets worry about high interest rates; yields on 30-year UK government bonds have reached 5% for the first time in a year, while the yield on 30-year US Treasures hit a 16-year high, causing a selloff that affected currencies such as the yen and rouble.
The fixed-income market is experiencing the "greatest bond bear market of all time" according to Bank of America Global Research, as the yield on 30-year US Treasuries hit a peak-to-trough loss of 50% and bond funds saw $2.5 billion in outflows, while shorter-dated paper and equity funds continue to see inflows.
The bond market has experienced its worst annualized returns in 20 years, leaving investors with significant losses and challenging traditional views of bond investments as safe and fixed income.
Despite disappointing performance in 2023, bond market experts believe that fixed income investments, particularly bonds, have a positive outlook due to the expectation that the Federal Reserve will soon stop raising interest rates. The rise in bond yields presents a buying opportunity, with reasonable valuations and high yields offering potential returns. However, the threat of elevated interest rates remains, impacting the value of fixed income investments. The experts advise diversifying within the fixed income asset class, considering options such as Treasuries, municipal bonds, and high-yield bonds, while being cautious about credit quality and duration.
Rising concerns over U.S. government spending and the budget deficit have led to a sell-off in Treasury bonds, pushing prices to 17-year lows as bond vigilantes punish profligate governments by selling their bonds.
As bond prices have plummeted in the past few years, making high-quality bonds more appealing, now is a good time to invest in investment-grade bonds through low-cost mutual funds or exchange-traded funds, as bonds still provide reliable income and diversification in investment portfolios.
The relentless selling of U.S. government bonds has caused Treasury yields to reach their highest level in over 15 years, impacting stocks, real estate, and the global financial system as a whole.
