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DISCLOSURES

The opinions expressed herein are those of Asset Preservation Advisors, LLC ("APA") and are subject to change without notice. This material is not financial advice, or an offer to sell any product. APA reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs, and there is no guarantee that their assessment of investments will be accurate. There is no guarantee that APA’s strategies or recommendations will equal or exceed expectations discussed. Asset Preservation Advisors, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about APA including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request or by calling (404) 261-1333. www.assetpreservationadvisors.com Asset Preservation Advisors Copyright 2024

  • Kyle Gerberding

TAKEAWAY TUESDAY: MAY 23, 2023



After bouncing along at relatively unchanged levels for the first 15 days of May, tax-free municipal rates have been following the repricing of the Treasury curve over the last 5 trading days, and has, in our view, created some very intriguing taxable equivalent yields for high-income earners.  


While our ultimate long-term view is still to extend duration, at opportune times, to lock-in rates in the intermediate part of the curve before the Federal Open Market Committee (“FOMC”) does move to more of a stabilization pattern and potential easing next year, we cannot ignore the levels of income that can be generated for the defensive-minded individual.  


There is widespread recognition of what the debt-ceiling battle has done to the T-bill market, but we have also seen a well-functioning municipal market send yields higher in the 1, 2, 3-year maturities as well.  


Taxable Equivalent Yields of the ICE 1-3 Muni Index and ICE 1-3 UST & Agency Index as of May 23 close




Source: Bloomberg


The other end of the spectrum is, of course, to take advantage of what could be a short-lived dislocation, and work out the curve and down a bit in credit quality.  As we head into a potential recessionary environment, we have had many conversations regarding our Enhanced Intermediate Strategy as of late, and the overall credit quality of the municipal market vs comparable corporates.  The rush to market by corporations, with over 100 bln of new supply coming in the last two weeks alone, and the ultimate rush of borrowing by the US Treasury once (if?) the debt ceiling is raised, makes the still shrinking exempt market seem conservative.  As we have discussed many times, the credit fundamentals of municipals vs corporates, as well as default history, leans the way of tax-frees, but the ultimate size of the BBB space in the corporate market is too vast to ignore.  Looking at single A tax-frees vs BBB corporates provides a decent picture of where things have gone as of late, and the taxable equivalent yield that can be generated for a long-term investor.


Taxable Equivalent Yields of ICE A Rated Muni Index and the ICE BBB Corporate Index as of May 23 Close




Source: Bloomberg


One thing that should be clear with the constantly changing expectations of FOMC actions, regional bank headlines, the tightening credit that may ensue, and of course, the theater in DC is that volatility in fixed income has not gone anywhere, and may be here to stay.  But as we first began to highlight last year, the income portion of that fixed income portfolio, at least, now provides a ballast during these uncertain times.



 

Disclosures:


Past performance is not indicative of future results. Investing involves risk including the potential loss of principal. This material is not financial advice, or an offer to sell any product. This is not a recommendation to buy or sell a particular security. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable, or will equal the investment performance of the securities discussed herein.


APA is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill of training. More information about the advisor including its investment strategies and objectives can be obtained by visiting www.assetpreservationadvisors.com. A copy of APA's disclosure statement (Part 2 of Form ADV) is available without charge upon request. Our Form ADV contains information regarding our Firm’s business practices and the backgrounds of our key personnel. Please contact APA at 404-261-1333 if you would like to receive this information.


APA-2305-39

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