The shape of the curve again has played a role, as the dollars reallocated out of the munis space went into shortduration taxables such as treasuries, agencies and Small Business Administration (SBA) floaters. Still, in spite of the conundrums facing portfolio managers in 2023, the muni market remains fundamentally attractive. The curve will one day regain its positive slope. It’s expected that muni supply will again begin to increase as COVID stimulus money is spent and populations grow. And credit quality remains solid; there have been far more credit rating upgrades than downgrades, and even perennial whipping boys New Jersey and Illinois have been awarded upticks by the ratings agencies. BUY CHEAP, SELL DEAR I wouldn’t be doing my job if I didn’t offer some suggestions. If you agree that the municipal bond market is indeed expensive, then perhaps you may consider a sale of some of your holdings. The three- to five-year sector may actually produce lower take-out yields than shorter maturities. It’s also becoming more evident that the banking industry is having a solid earnings year in spite of margin compression, so a loss-earnback extension swap may have some interest. Recall, too, that the TEFRA penalty (remember that little acronym?) will start to take a bigger bite out of your taxequivalent yields as your cost of funds continues to rise. This is especially true for your General Market bonds, which have a much higher TEFRA hit than Bank Qualified munis. It’s déjà vu all over again and could be more reasons to at least temporarily allocate out of some taxfree bonds. On the other hand, 6%+ tax-equivalent yields are available now for those S Corps willing to invest for 20 years or so. Ultimately, the message of this column is that “munis matter.” If you’ve put that sector on autopilot because of perceived lack of value in the new issue market, take a look at your portfolio and ask your brokers for some bids on shorter maturities. You may find an inexpensive source of liquidity. Now that we’re refreshed on some of the finer points of municipal bonds, I’m thinking of Mark Twain’s observation: “A clear conscience is a sure sign of a bad memory.” Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Community Banker 17
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