Snapshot of the municipal bond landscape

Drew O’Neil discusses fixed income market conditions and offers insight for bond investors.

The overall size of the municipal bond market is over $4 trillion. While this a very large market, an investor’s personal situation combined with the nuances of the municipal bond market can sometimes make it feel much smaller. Investor preferences such as coupon, maturity, call structure, and issuing state can shrink the available investment options considerably. There can be a benefit for investors living in states with high income taxes to purchase municipal issues from their own state, which in most situations avoids state, in addition to federal, taxes. Still, there are many situations where an investor might be better served looking for opportunities nationwide rather than isolating themselves to their home state.

Municipal bond availability and the state tax rate are two of the primary factors used to evaluate the use of in-state or national issues. The chart identifies each state’s highest income tax rate and the total bonds outstanding. Although the $4 trillion municipal market provides a wide range of opportunities, tight personal criteria can eliminate as much as 97%-99% of the total market. For example, Iowa only has ~$26.4 billion in bonds outstanding or just 0.7% of the total market. Searching for only Iowa bonds eliminates 99.3% of the market.

Considering both the state tax rate and the availability can provide a reasonable roadmap for identifying municipal bonds. The lower the state tax rate and the lower the number of total bonds outstanding, the more likely that exploring bonds outside of your home state might make sense. Arizona, for example, has a low state tax rate of 2.5% and only 1.5% of the total bonds outstanding. Looking beyond Arizona-issued bonds opens opportunities. Oftentimes, higher yields for out-of-state bonds more than offset the in-state tax savings gained by purchasing in-state issues. Conversely, investors living in states with high state income taxes are more likely to benefit from in-state issues. A California investor subject to a 13.3% state tax, is likely best served by sticking with California bonds. California also boasts $642 billion bonds outstanding making availability more likely.

Your financial advisor and the Fixed Income Solutions associates will consider your specific situation and whether it is advantageous to look for in-state issues or also seek out-of-state issues that may provide better net income and diversification.

Raymond James is not a tax advisor and does not give tax advice. Please consult a tax professional prior to making any investment decisions.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.