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Taking Advantage of the Infrastructure Boom: The Case for Taxable Municipal Bonds

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Taxable municipal bonds infographic

taxable municipal bonds

The Case for Taxable Municipal Bonds for Investors

If you’re a homeowner, there are probably a few things you’ve been neglecting to do. Perhaps the kitchen needs upgrading, or the roof needs replacing. We tend to procrastinate on these improvements due to large renovation costs, until it hits a point where we can’t ignore them anymore. This is the state that U.S. infrastructure has reached—on a national scale.

Today’s infographic from New York Life Investments highlights the level of disrepair in U.S. infrastructure. It also explores why taxable municipal bonds, which will finance the required infrastructure upgrades, provide such an interesting investment opportunity.

Falling Apart at the Seams

The American Society of Civil Engineers (ACSE) regularly assesses the nation’s infrastructure—things like bridges, airports, and drinking water—and scores it in a ‘report card’. After decades of neglect, the U.S. only scored a D+ in 2017.

The ASCE estimates that $4 trillion is needed to bring infrastructure up to a B grade, $1.3 trillion of which will be provided by state and local governments.

The urgent needs for increased investment in America’s infrastructure continue to grow and our nation’s economic vitality and quality of life are at stake.

— Ed Mortimer, U.S. Chamber Vice President of Transportation and Infrastructure

U.S. municipal bonds will be the primary funding source for this massive financing need. These bonds are quite popular with individual U.S. investors, as the interest income from most municipal bonds is not subject to federal income tax.

However, the U.S. tax code limits the volume of non-taxable bonds issued, and the purposes for issuing them. As a result, many local and state governments have been turning to taxable municipal bonds to finance their infrastructure projects.

The Muni Opportunity

Taxable municipal bonds are a potentially attractive investment for many reasons.

1. Competitive Historical Yield and Strong Returns
In the last decade, a lagging global economy led to historically low interest rates—many sovereign (national) bonds fell into negative territory. Taxable municipal bonds provided an alternative source of yield potential, outpacing the yields of comparable treasury bonds in some cases.

Not only that, but in the post-crisis era, taxable municipal bonds have averaged a return of 6.9% per year, beating the 4.6% performance on U.S. corporate investment-grade bonds, a staple in most institutional portfolios.

2. High-Quality, Stable Credit Ratings
Most municipal bonds are high quality with low default rates, making them attractive to risk-conscious investors.

 U.S. MunicipalsGlobal Corporates
Rating SpreadOver 76% rated A+ or betterOnly about 10% are AA rated
Tiny portion below investment gradeNearly half are below investment grade
Default Rate0.81% for those rated BAA by S&P0.84% for those rated AAA by S&P

Historically, municipal bond ratings have also been far more stable than that of global corporates.

3. Inefficient pricing
The municipal bond market is highly fragmented, and most issues are too small to be included in a market index.

This market fragmentation, combined with limited sell-side research and many buy-and-hold investors, often leads to inefficient pricing. Active investors have the potential to generate higher returns by applying their credit research and trading skills.

4. Low Correlations
Correlation measures the degree to which two securities move in relation to each other. In general, taxable municipal bonds have a low correlation to other fixed-income sectors. This means they help provide portfolio diversification and reduce volatility.

5. Longer durations
Since taxable municipal bonds fund long-term capital projects, they are usually financed with longer maturing bonds. Institutional investors welcome this source of long-duration assets, as they can match them up with their long-dated obligations.

A Compelling Portfolio Addition

Taxable municipal bonds have many positive qualities that make them a strong contender for investment. When added to a diversified fixed-income portfolio, they may also improve the risk/return profile.

As the U.S. begins to revitalize its infrastructure, taxable municipal bonds present a strong—and often overlooked—opportunity for investors.

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Cities

Ranking the World’s Most Populous Cities, Over 500 Years of History

This two-minute animation shows changes in the last 500 years of historical rankings for the world’s 10 most populous cities.

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Animation: The Most Populous Cities, Over 500 Years

What do Beijing, Tokyo, Istanbul, London, and New York City all have in common?

Not only are they all world-class cities that still serve as global hubs of commerce, but these cities also share a relatively rare and important historical designation.

At specific points in history, each of these cities outranked all others on the planet in terms of population, granting them the exclusive title as the single most populated city globally.

Ranking the World’s Most Populous Cities

Today’s animation comes to us from John Burn-Murdoch with the Financial Times, and it visualizes cities ranked by population in a bar chart race over the course of a 500-year timeframe.

Beijing starts in the lead in the year 1500, with a population of 672,000:

RankCityPopulation in Year 1500
#1🇨🇳 Beijing672,000
#2🇮🇳 Vijayanagar500,000
#3🇪🇬 Cairo400,000
#4🇨🇳 Hangzhou250,000
#5🇮🇷 Tabriz250,000
#6🇮🇳 Gauda200,000
#7🇹🇷 Istanbul200,000
#8🇫🇷 Paris185,000
#9🇨🇳 Guangzhou150,000
#10🇨🇳 Nanjing147,000

In the 16th century, which is where the animation starts, cities in China and India were dominant in terms of population.

In China, the cities of Beijing, Hangzhou, Guangzhou, and Nanjing all made the top 10 list, while India itself held two of the most populous cities at the time, Vijayanagar and Gauda.

If the latter two names sound unfamiliar, that’s because they were key historical locations in the Vijayanagara and Bengal Empires respectively, but neither are the sites of modern-day cities.

The 1 Million Mark

For the first minute of animation—and up until the late 18th century—not a single city was able to eclipse the 1 million person mark.

However, thanks to the Industrial Revolution, the floodgates opened up. With more efficient agricultural practices, better sanitation, and other technological improvements, cities were able to support bigger populations.

Here’s a look at the biggest cities in the year 1895:

RankCityPopulation in Year 1895
#1🇬🇧 London5,974,000
#2🇺🇸 New York3,712,000
#3🇫🇷 Paris3,086,000
#4🇺🇸 Chicago1,420,000
#5🇯🇵 Tokyo1,335,000
#6🇷🇺 St. Petersburg1,286,000
#7🇬🇧 Manchester1,244,000
#8🇬🇧 Birmingham1,074,000
#9🇨🇳 Beijing1,055,000
#10🇷🇺 Moscow1,002,000

In the span of roughly a century, all of the world’s biggest cities were able to pass the 1 million mark, making it no longer a particularly exclusive milestone.

Modern City Populations

Finally, let’s look at the modern list of the top 10 most populous cities, and see how it compares to rankings from previous years:

RankCityPopulation in Year 2018
#1🇯🇵 Tokyo38,194,000
#2🇮🇳 Delhi27,890,000
#3🇨🇳 Shanghai25,779,000
#4🇨🇳 Beijing22,674,000
#5🇮🇳 Mumbai22,120,000
#6🇧🇷 Sao Paulo21,698,000
#7🇲🇽 Mexico City21,520,000
#8🇪🇬 Cairo19,850,000
#9🇧🇩 Dhaka19,633,000
#10🇺🇸 New York City18,713,000

Interestingly, the modern list appears to be a blend of both previous rankings from the years 1500 and 1895, listed above.

In 2018, cities from China and India feature prominently, but New York City and Tokyo are also included. Meanwhile, Latin America has entered the fold with entries from Mexico and Brazil.

The Future of Megacities

If you think the modern list of the most populous cities is impressive, check out how the world’s megacities are expected to develop as we move towards the end of the 21st century.

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The 8 Ways Urban Demographics are Changing

These pivotal trends show how urban demographics are aiding in the transition to a very different economic and investment landscape.

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The 8 Ways Urban Demographics are Changing

Cities are what keep the global economic machine humming.

Over 80% of the world’s economic output is derived from activities in cities – and more specifically, it’s estimated that 60% of GDP growth occurs in just the top 600 urban centers.

Given the above, it’s fair to say that the destiny of humankind is directly linked to what happens in major cities. Further, how urbanization plays out over time could end up having a significant ripple effect on the economy, and we should pay close attention to such trends.

Urbanization 2.0

Today’s infographic comes to us from Raconteur, and it showcases eight different ways that urban demographics are evolving.

Below we will summarize the changes, along with potential impacts on the economy:

1. A Higher Percentage of Urban Dwellers

Between 1950 and 2018, we went from 30% to 55% of the world’s population living in cities. This has been driven largely by today’s middle and high income economies in places like North America, South America, Europe, and Japan.

The next stage of urbanization will see us move to 68% – more than two-thirds of the world’s population – living in these urban conglomerations. It will be driven by countries in developing markets, creating a potent investing megatrend along the way.

2. The Countries Driving Growth

It’s estimated that three countries will combine for 35% of all urban population growth.

RankCountryGrowth in Urban Population (2018-2050)% of Global Urban Growth
World860 million people35%
#1India416 million people17%
#2China255 million people10%
#3Nigeria189 million people8%

In total, there will be 2.5 billion more urban dwellers in 2050 than there are today. Many of these people will experience rising incomes in cities, increasing the global middle class to an unprecedented size.

3. Peaking Rural Populations

On the flipside, it appears the world’s rural population has nearly flatlined, with anticipation that it will peak in absolute terms in the next couple of years. Rural populations have been slowly growing since 1950 until this point.

4. The Rise of Megacities

There will be 43 megacities by the year 2050, which is more than quadruple the amount that existed back in 1950.

The changing geography of the world’s megacities will be one of the major forces that shapes the future of the global economy and accompanying investment trends.

5. New Population Centers

By 2050, more than 70% of the world’s urban population will live in Asia or Africa. Meanwhile, North America and Europe will combine for closer to 15% of that total.

6. De-Urbanization

The role of de-urbanization is often downplayed or forgot about when discussing urban demographics, but it is an interesting issue.

Factors such as falling fertility rates, economic contraction, and natural disasters are actually shrinking the size of some cities. In fact, McKinsey predicts that 17% of cities in developed regions will see a drop in population between 2015-2025.

7. Disparities in Urban Growth

The rate for urban population growth is actually trending down across all types of economies – however, these rates come from very different starting points.

High income countries are currently averaging growth of less than 1% per year, and this will continue to decline to below 0.5% per year by 2050. Over the same time period, low income nations will go from 4% to 3% per year.

8. Changes in Average Age

The age distributions in large cities within developed nations will begin to skew older, something we’ve shown previously when looking at the median age of every continent.

The biggest impact here may be felt on dependency ratios in the workforce. With a smaller pipeline of new workforce entrants and a burgeoning population of seniors, this changing ratio is one of the most significant stories impacting urban demographics.

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