The politics surrounding taxes and the larger economy are revealing new opportunities in some municipal bonds and more reasons to sell others, according to a panel of experts.
Bonds connected to some universities and hospitals will likely see the biggest negative impact from the passage of the One Big Beautiful Bill Act's package of higher taxes on college endowments and cuts to Medicaid spending. But the industry's fear
President Donald Trump's trade wars may also affect municipal bonds, based on "the extent that it creates uncertainty and potentially weakens the economy," said Courtney Wolf, a portfolio manager with Capital Group, the parent company of American Funds. However, municipal bonds include
"That's the great thing about
So if investors deem barriers to one particular vehicle's future credit and yields to be a "high probability event," that presents them with "a real opportunity to sell that bond into the market and buy something that's much more insulated," she added.
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Munis in general
Many investors wondering about their portfolios' possibilities with municipal bonds pay close attention to the ratio of their yields compared to U.S. Treasury notes, the panel's moderator, Elizabeth Foos, an associate director of fixed-income strategies with Morningstar Research Services, wrote
That ratio typically "hovers near 80% to 90%, with anything over 100% suggesting that munis are a very good deal as they're yielding more than a comparable U.S. Treasury," she wrote. "While the choppy waters aren't appealing to all investors, many municipal portfolio managers see the market volatility as an opportunity to uncover attractive valuations."
That combination of possible volatility and tax advantages explains the appeal of municipal bonds in particular, and many of the top firms in asset management are focused on the general attraction of fixed-income products in the current environment. In
"Most investors, certainly most of our 50 million investors, what they probably need more of today is more fixed income. The rate environment is looking better. They're entering retirement. There's been a fantastic run-up in the past decades in U.S. equities, and so they need some balance in their portfolio, but they're just paying too much for it," he said. "Sure, there are things to do with private credit and
But municipal bond investment managers are looking much more closely at that asset class specifically and what will become of universities, hospitals and state and local governments if Trump and his Republican allies in Congress pass the giant tax and spending bill as soon as this week. Hospitals that provide care to a lot of patients through Medicaid spending are facing a lot of risks from the legislation, noted Curtis White, a portfolio manager with the Tax-Aware Fixed Income Group of JPMorgan Chase.
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Hospitals and universities in focus
In that vein, bonds connected to universities may be ripe for a change to, for example, a "water and sewer bond with the same spread," since new taxes on colleges' endowments could affect their fixed-income issuances, White noted. That's why the ramifications to both those parts of the municipal bond universe and state and local governments' budgets based on "the federal policy changes that are coming through" represent important barometers, White said.
"It's getting to a point where some of these state and local governments are going to have to start making tough decisions," he said. "That's just a high focus for our analyst team."
Budgetary strains on state and local governments with the end of Covid-era federal reimbursement programs next year and the cuts to Medicaid under the legislation add up to a good time to sell many hospital municipal bond instruments, noted David Hammer, the head of municipal bond portfolio management for PIMCO.
That won't be true, though, for all of the municipal bonds in the health care sector, and certainly not for the highest rated municipal fixed-income securities, he said.
"I think we've seen the worst of it in high-quality munis," Hammer said. "The lowest-quality portions of the credit market are a very different story. … We're likely to experience significant credit widening over the next year or two."