The market has been predicting a bond market blow out now for at least three years. Good. Sort of. If the tax-exempt municipal bond market goes down, USAA says they will buy on the lows and lock in high rates. As it is now, a 30 year triple A rated muni bond yields a measly 3.1%.
Regina Conklin, Senior Portfolio Manager of Tax-Exempt Investments for USAA thinks muni bonds face uncertainties with the new Trump administration, and “we are keeping a close eye on changes in tax rates and policies,” she says here.
One thing to look at: if the new administration cuts income taxes, munis’ taxable-equivalent yields would become less attractive, and this could impact demand, sending prices lower. Another thing: the revamp to the Affordable Care Act, which could create some challenges for municipal hospitals that issue debt.
Another issue that we have addressed here on the RIA Channel is infrastructure. The president’s pledge to boost infrastructure spending by $1 trillion could be good news for municipal bonds, basically in terms of new issues. These new issues will also come at a higher coupon rate as the Fed keeps raising rates, so that will give RIAs a chance to lock in higher rates for their fixed income clients.
President Trump is exploring other sources of funding, so it is unclear whether the supply of munis will expand as a result of his initiative, however.
“This uncertainty could create some volatility in municipal bonds,” Conklin writes. “It could temporarily depress prices and boost yields. That could create opportunities for us. We continue to focus on income and look for opportunities to lock in higher yields.”