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Barron's Penta section recently ran an article entitled "Future Returns: Navigating the Municipal Bond Market." The piece was meant to advocate for the continued exposure to municipal bonds in the portfolios of the wealthy.

With Democrat control of Congress and legislative priorities pointing to higher taxes on the horizon, on its face that kind of enthusiasm for fixed income securities that are tax free makes sense. But the scale of the that enthusiasm boggles the mind. Per the article:

" Estimated net cash flows into municipal bond mutual funds and exchange-traded funds reached US$79.25 billion through the end of August this year compared with US$15.73 billion in the same period a year ago, according to Refinitiv Lipper data. Those are the largest inflow totals for municipal bonds on record, according to the firm, a unit of the London Stock Exchange Group."

Furthermore, the article notes that those flows are chasing yields that are now in some cases no higher on an after tax basis than Treasury securities of similar maturities. Said the article:

"The relative after-tax advantage of munis, as a result, was historically low on all maturities as of the first half. Today, the tax-equivalent yield differential between munis and Treasuries is so slim that in some cases it doesn’t exist at all, Flahive says.

Total returns for munis have also been modest. The US$14 billion Vanguard Tax-Exempt Bond fund, a national intermediate municipal bond fund, returned 1.32% through Monday, Sept. 13, compared to 4.98% in 2020 and 7.45% in 2019, according to Morningstar. "

Given these yields, and the prospect for a secular trend of rising rates over the next few years as Fed accomodation eases and price discovery returns to the fixed income markets, I can't be the only one failing to see the value here in muni land. Assuming the stock market doesn't totally collapse between now and year end, any decent fixed indexed annuity with an S&P cap will likely strongly outperform many a muni fund for calendar year 2021. And while the annuity is only tax-deferred vs tax free, the ability to control when taxes are paid - and at what tax bracket those taxes will be paid - can't be discounted.

For more on fixed indexed annuities as compared to bonds, see the RAF Relative Value Indexes section of the website.

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