At Eaton Vance’s daily 8:45 a.m. meetings with fixed-income executives, a usually overlooked segment of the bond world has been coming up more often.
That’s because a deluge of debt sales unleashed this year in the $485 billion taxable municipal-bond market is luring buyers unfamiliar with the world of public finance.
So traditional corporate-debt investors are getting crash courses on concepts like a general-obligation security pledge -- which is basically just a promise to repay -- and gauging how easy it will be to resell the securities when they need to raise cash. Others are dialing up their long-standing municipal-bond teams as they wade into a market that dangles higher returns and low odds of default, a standout at a time of negative interest rates overseas and frequent speculation about mounting credit risks in corporate America.
So Vishal Khanduja, who heads Eaton Vance’s investment-grade portfolio management, and Craig Brandon, who leads the firm’s municipal-bond investing, have been talking about taxable municipals more and more.
“In the morning meeting, the discussions have been lively over the last two months,” said Khanduja, who has been buying taxable munis for his corporate-bond portfolios, as his team has in the past on occasion.
The surge in issuance is a side effect of President Donald Trump’s 2017 tax-cut law, which took away the power of states and cities to sell tax-exempt bonds for a key refinancing technique.
But rates have fallen far enough that they can even sell taxable bonds -- which carry higher yields -- to pay off old tax-exempt debt and still come out ahead. As a result, states and municipalities have sold about $69 billion of taxable bonds this year, nearly twice as much as last year and the most since the Build America Bonds program lapsed after the end of the recession.
The swift pace of issuance has pushed up yields on certain taxable munis, which offer about 86 basis points more than U.S. Treasuries for those due in 10 years. That’s about 18 basis points more than what AA rated corporate bonds offer.
Lesya Paisley, an investment director at Aberdeen Standard Investments who is leading the firm’s taxable muni purchases, said corporate accounts that can buy them are increasing their exposure. “We’ve been welcoming the supply that’s coming,“ she said.
Paisley pointed to a triple-A rated taxable deal by the Texas Transportation Commission in November, which priced to yield 52 basis points more than Treasuries due in 2027. Debt maturing in 2027 issued by Microsoft Corp., which is also rated AAA, traded Nov. 20 at a 36 basis-point spread.