Blackrock‘s Head of Municipal Bonds
With taxes top of mind, we sat down with Blackrock’s Peter Hayes to understand how municipal investments can improve the tax-effiency of your portfolios.
Peter, what impact has tax reform had on municipal bonds?
Tax reform had the largest positive impact on corporations with their tax rate dropping from 35% to 21%. For individual investors, the top tax rate fell just 2.6% to 40.8%. Plus, with deductions on the previously unlimited state and location taxes (SALT) now capped, we are seeing increased appetite for tax shelters from individual investors in high-tax states. We believe municipal bonds still look attractive when considered on an after tax basis.
What is your outlook for municipal bonds?
We see potential for heightened volatility should uncertainty increase around Fed policymaking decisions, the midterm elections and geopolitical
developments. Amid heightened volatility and higher valuations for equities, municipal bonds remain an attractive diversifier as the asset class is negatively correlated to equities. Longer-term effects on issuer fundamentals heightens the need for diligent credit research. We believe the US economy will remain strong into next year and interest rates will continue on a moderate upward progression. That said, higher interest rates have led to more demand for perceived ‘safe’ assets as fixed income yields look more attractive.
How can municipals help your portfolio if equity markets weaken?
Investors need to make sure their portfolios are diversified. One thing to consider is building ballast or shock absorbers into portfolios. Municipal bonds can help add ballast to equity risk because they have
a negative correlation to the S&P 500. Our analysis found that in the 12 months since 2010 in which the S&P 500 Index was down more than 2%, municipal bonds were up an average of +0.76% — which was more than taxable bonds1.
How should investors use municipal products to build a portfolio?
It depends upon the investor’s investment objective and what role the investment is playing in the portfolio. For instance, an investor that is more risk adverse or maybe has a shorter time frame may want to consider the ishares Short-term National Muni Bond ETF (SUB) which provides intraday liquidity, precision exposure to short term muni bonds and has the lowest expenses of any municipal bond ETF in the industry at just 0.07%. Additionally, we offer the Blackrock Strategic Municipal Opportunities Fund (MAMTX), a flexible, municipal solution that seeks to provide investors attractive tax-advantage income and returns through diverse market environments.
What differentiates the Blackrock approach towards municipal investing?
Today access to inventory is critical. As one of the largest managers of municipal assets, Blackrock has both the resources to seek out bonds at favorable prices and the research to avoid ones that may be vulnerable to downgrades. Our scale, credit research and risk management capabilities have helped us deliver long term value to our clients.
PETER HAYES is Chief Investment Officer and Head of the Municipal Bond Group within Global Fixed Income. He is a member of the Global Fixed Income Executive Committee and Blackrock’s Global Operating Committee.