U.S. retail investors have long dominated the U.S. municipal bond market, but over the last decade, institutional interest in the sector has soared, particularly outside the U.S. and specifically in taxable municipal bonds.
So far, these non-traditional investors, including pension funds, insurance companies and family offices, have been rewarded. Over the last 10 years, taxable U.S. municipal bond returns have topped all but one major bond sector, U.S. high yield.
For example, the sector's 6.9% annualized total return for the period handily outperformed the 4.6% return on U.S. corporate investment-grade bonds, a staple in most institutional portfolios.
But strong returns are just one of many reasons that institutional investors have ventured into the asset class. Taxable municipal bonds are also garnering interest due to their high-quality ratings, longer durations, and low correlations and diversification to other asset classes.
In addition to these compelling attributes, many institutional investors today say they see taxable municipals as an attractive late-cycle asset class. With the U.S. economic recovery now longer than all but one in history, and the global economy still fragile, many of these investors welcome the higher credit quality and more reliable ratings stability of municipals vs. other fixed-income sectors. The virtues of the asset class were most recently on display during December 2018's market volatility as investment-grade corporate spreads widened sharply while taxable municipal price volatility was muted.