Global Investors View Munis as Safer Risk-Off Asset: Morgan Stanley's Craig Brandon

Munis as a Safer Risk-Off Asset

• 🌎 Global investors, particularly in Japan and Korea, are increasingly viewing municipal bonds (munis) as a safer risk-off asset class.
• 💡 Munis offer a way to take credit risk off the table without sacrificing yield or duration, with most having double or triple-A ratings.

Impact of Economic Slowdown on Munis

• ⚠️ A potential economic slowdown could impact munis through reduced tax and toll revenues.
• 📉 However, a slowdown may also lead to falling interest rates, which could attract assets into the muni market and potentially boost performance.
• 📊 While there's a slight risk of downgrades (e.g., from double-A plus to double-A), this is considered a minor change in reality.

Performance and Market Environment

• 📈 In 2022, rising rates led to poor performance for bonds, including munis.
• 💰 In 2023, as rates began to fall, money flowed back into the muni market, leading to positive performance.
• 🔗 Muni performance is correlated to market flows and interest rate movements.

Attractiveness of Munis vs. Other Assets

• 🏦 Non-traditional buyers are beginning to re-enter the muni market as they become attractive relative to corporates and treasuries on an after-tax basis.
• ⚖️ Munis are becoming attractive when their outright rate approaches treasury rates, especially on the long end (around 90% of treasury rates).
• 📈 This attractiveness is drawing in buyers like insurance companies and hedge funds.