Is now a good time to consider US taxable municipal bonds?
In our view, taxable municipal bonds can help European insurance investors navigate the potential effects of inflation and rising interest rates. They offer robust credit quality and strong fundamentals, boosted by recent COVID-19 related government financial support. They can provide potential diversification benefits as good alternatives to government bonds.
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We believe taxable municipals are compelling based on attractive valuations following recent market volatility and improved fundamentals boosted by generous federal stimulus funding.
Amid volatile markets, insurers strongly favour investments in high-credit-quality assets.
The average rating of the taxable municipal bond market is very high (Aa2/Aa3). This average credit quality compares favourably to the European bond market (Aa3/A1). Source: Bloomberg, 30 June 2022.
We believe most municipal issuers are well positioned to fare well amid higher inflation and interest rates due to their efforts in recent years to adopt various forms of pension reform and reduce debt burdens.
Solid municipal credit fundamentals have been strengthened by federal stimulus funding under the CARES Act, the American Rescue Plan Act, and most recently, the Infrastructure Investment and Jobs Act (IIJA).
Our latest paper assesses the current market drivers impacting the asset class and its potential suitability to European insurers, including:
- Legislative developments: Federal stimulus to Municipals
- Valuations have significantly improved due to market volatility
- Attractive relative value compared to European corporates
- Potential diversification benefits for European investors
Positive credit implications of the infrastructure spending law