Fundamental and technical analysis 

As investment professionals, we often talk about fundamentals. These are the underlying considerations that support a particular bond issuer or industry. For example, when we analyze taxable municipal bonds, we talk about demographics, days of cash on hand, revenue backing, and a variety of other quantitative and qualitative considerations. 

There is also the concept of market technicals, which is something that casual investors may not consider. Technical metrics can include factors such as, how many bonds does an issuer have outstanding? Is there excess demand for the types of bonds relative to their supply? Right now, technical factors are supporting valuations of taxable municipal bonds, which are key components of nearly all our taxable bond Wasmer Schroeder^™ Strategies. 

A recent-year downturn in issuance

New taxable municipal bond issuance has significantly declined in recent years, as Exhibit 1 illustrates. This has been caused by the flood of money that was transferred from the Federal Government to State and Local Governments during the COVID-19 Pandemic. This has allowed most municipalities to bolster their finances, lowering their need to raise new money in the primary market by issuing new municipal bonds.

Exhibit 1: Issuance has been trending lower since 2020

 * 2024 represents YTD totals through 03/03/24. 
Sources: Bloomberg; LEAG function, for U.S. municipal long-term, plus municipal-backed corporate bonds. The taxable municipal bond market is approximately $830 billion, as of 12/31/23. 

In addition, many large municipal bond issuers have recently tendered for some of their taxable bonds, funding those purchases by issuing tax-exempt municipal bonds at very attractive rates. There has also been a recent trend where some large issuers have been refinancing their Build America Bonds—taxable municipals issued after the Great Recession—because they can exercise their call features and buy the bonds back before maturity. Then they effectively reissue the bonds at aggressive levels as tax-exempt municipal bonds, instead.

Our viewpoint on this relative value opportunity 

So, increased calls to refinance the taxable municipal bonds, combined with lower issuance in recent years, and continued strong interest in the taxable municipal market in general have created a favorable technical backdrop that continues to support valuations in these securities. As longtime participants in the municipal market, we have a deep and strong commitment to this sector and have included taxable municipal bonds in portfolio construction for our separately managed accounts for decades. For a deeper dive into the taxable municipal bond market, consider reading our white paper on the subject, titled “A case for taxable municipal bonds.”