For municipal bond investors, do returns come from capital appreciation or income????
We wrote previously about the hidden-value of muni investing over treasuries (The Hidden Value of Municipal Bonds - Munis or Treasuries??? (alphawatch.blog)).
According to analysis from our friends at SWBC, income accounted for 78% of the return for Municipal bonds over the last 20 years. Considering interest rates were so low for the majority of that time frame, we would expect income to be a bigger part of return going forward now that interest rates are significantly higher.
Based on a SWBC internal benchmark of 39 funds which includes pure high yield funds and investment grade funds, the average yield broken down by strategy looks like the following:
Long term Muni funds 3.77%
Intermediate Muni funds 3.11%
High yield funds 4.85%
In regard to the performance question
Year to date:
BB MUNI BOND INDEX -2.22%
BB LONG TERM MUNI INDEX -3.80%
FIRST TRUST CEF INDEX -12.01%
Digging deeper, SWBC considered a total return analysis for Muni bonds over a 1-year period given various interest rate moves:
A 150bps increase in rates would mean a -11.86% total return move for muni bonds
On the other hand, a -150bps move would mean a +16.94% increase in total return for munis.
Thus, we are cheering for a rate decrease. And even if rates stay the same, we should see a +5% return for muni bonds
The point is that rates have risen so far that they would have to go significantly higher to produce a negative return from this point.
Munis are starting to look pretty attractive.