creeps back toward three percent and people haul billions of dollars out of their bond funds, it seems fair to say that investors are less than thrilled with fixed income right now. At least with the most popular, traditional routes.
But according to John Miller, who heads up the tax-exempt bond team at Nuveen Asset Management, there are at least three key specialty plays in the tax-free sector right now. As we discuss in the attached video, they could not only change your results, but the way you think about munis.
1) Coastal Plays: California and New York
These east and west coast giants make Nuveen’s special situations list for a number of reasons, but none more than the sheer size and diversity of their respective economies; both of which Miller says are improving.
“There are a couple of different reasons why munis in California and New York have outperformed,” he says, noting their “very, very high (state) income tax rates” of up to twelve percent.
Not only are they starting to see benefits from economic improvement but he says their budgets are looking a lot better too.
“We expect them to continue to outperform,” he adds, in part due to the fact that a 5% tax-free return is equivalent to an 11.5% taxable return in the top brackets.
He says when you add together the state, federal and medicare taxes, affluent Californians currently forfeit almost 57% of their income!
2) The Beltway Benefactors: Virginia and Maryland
It’s no secret that the growth of government has been the key driver of the above-average economic rebound that cities and towns surrounding Washington D.C. have been enjoying. Miller says no where is this more pronounced than in Virginia and Maryland, where both states carry AAA credit ratings.
“A lot of their employment base relates to the federal government, including the whole defence industry,” he notes. But unlike the cyclicality that is currently lifting places like New York and California, Miller says these beltway muni plays are themselves sort of defensive.
“These states fall much less than the overall economy when there is a recession,” Miller says, and they also enjoy “high wealth levels, high real estate values, and very high levels of educational attainment.”
3) The Budgetary Beauties: Minnesota and North Carolina
In the summer of 2011, you’ll recall, the United States was stripped of its AAA credit rating by Standard & Poor’s. Not for its ability to pay its bills, but rather, for its unwillingness to do so in an orderly and rational fashion.
The dysfunction and gridlock that is emblematic of Washington and Congress, however, is not the situation in many state capitals, and it is precisely why Miller has put places like Minnesota and North Carolina on his special situations list.
“Both are very conservatively managed in terms of their debt profile and the constitutional guarantees of debt repayment,” Millers reveals. “In Minnesota, they actually have to pre-fund their debt service eighteen months in advance, in cash,” he says, adding that the land of 10,000 lakes also sports a $1 billion rainy day fund.
Interestingly, these two prudent places are taking different routes when it comes to policy, Miller says, with Minnesota raising its top tax bracket to 10% and North Carolina cutting its rate to broaden out its base of taxpayers.