UBS Financial Services Inc. is urging investors to buy the debt of states, whose credit quality is among the highest in the $4 trillion municipal bond market and whose bonds are offering sky-high after-tax yields.
Strong revenue growth, record-high cash reserves and billions in pandemic stimulus strengthened the credit quality of US states, just as a muni market selloff has driven yields to their highest levels since the financial crisis more than a decade ago.
In New York, for instance, yields on 30-year debt are 4.8%. On a tax-equivalent basis, which accounts for tax savings, that translates to roughly 9.8% for buyers in the state’s top tax bracket, according to a Friday research note by Kathleen McNamara, senior municipal strategist at UBS.
“Given the higher yield environment, we believe that high quality state GO bonds now present an attractive risk-return tradeoff for long-term investors,” McNamara wrote.
The report also highlighted states like California, Texas and Washington, where investors in the top tax bracket can reap yields ranging from 8% to 10% for long-maturity, general-obligation debt. For New Jersey, UBS strategists suggested bonds in the 15- to 21-year maturity range.
State level credits even outside of the general obligation sector are providing extra yield. Take 30-year bonds sold this month by the New York Power Authority. They’re trading at about 5.2%. On a tax-equivalent basis that would earn about 10.7% for investors in the top bracket, according to an online tool from Eaton Vance Management.
Year-to-date, state general-obligation debt has lost 1.8%, according to data compiled by Bloomberg, outperforming the 3.45% losses from local credits and the 2.26% losses among munis broadly. UBS attributes the losses to the surge in rates, rather than declining credit fundamentals.
Dora Lee, director of research for Belle Haven Investments, echoed the recommendation.
“In muniland, you are talking about single and double A-rated credits offering these very attractive yields for a minuscule default rate,” Lee said. “You can find very good opportunities within your home state.”
This article was provided by Bloomberg News.