The Same, Only Different: Municipal Bonds After Tax Reform

Municipal bonds have generated strong returns in the wake of the Tax Cuts and Jobs Act (TCJA) despite lower corporate and individual tax rates. Light new issue supply and heavy demand from retail investors have fueled this performance. Since the TCJA was enacted, we have counseled taxable insurance clients on the attractive attributes of municipal bonds in their strategic asset allocation. Municipal bonds offer a higher credit quality profile, have low correlations with other global fixed income sectors, exhibit defensive price behavior during rising rate environments and have typically produced higher risk adjusted returns than most other fixed income asset classes. The resiliency of the municipal market since the enactment of TCJA continues to support our conviction that municipal bonds remain an attractive asset class for taxable insurance companies. However, the lower corporate tax rate has reduced the income advantage of municipal bonds, making the opportunities less consistent and requiring a more active approach to maximizing contribution from the sector.