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. Municipals||Global Corporates|
|Rating Spread||Over 76% rated A+ or better||Only about 10% are AA rated|
|Tiny portion below investment grade||Nearly half are below investment grade|
|Default Rate||0.81% for those rated BAA by S&P||0.84% 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.
Ranked: The Autonomous Vehicle Readiness of 20 Countries
This interactive visual shows the countries best prepared for the shift to autonomous vehicles, as well as the associated societal and economic impacts.
For the past decade, manufacturers and governments all over the world have been preparing for the adoption of self-driving cars—with the promise of transformative economic development.
As autonomous vehicles become more of a looming certainty, what will be the wider impacts of this monumental transition?
Which Countries are Ready?
Today’s interactive visual from Aquinov Mathappan ranks countries on their preparedness to adopt self-driving cars, while also exploring the range of challenges they will face in achieving complete automation.
The Five Levels of Automation
The graphic above uses the Autonomous Vehicles Readiness Index, which details the five levels of automation. Level 0 vehicles place the responsibility for all menial tasks with the driver, including steering, braking, and acceleration. In contrast, level 5 vehicles demand nothing of the driver and can operate entirely without their presence.
Today, most cars sit between levels 1 and 3, typically with few or limited automated functions. There are some exceptions to the rule, such as certain Tesla models and Google’s Waymo. Both feature a full range of self-driving capabilities—enabling the car to steer, accelerate and brake on behalf of the driver.
The Journey to Personal Driving Freedom
There are three main challenges that come with achieving a fully-automated level 5 status:
- Data Storage
Effectively storing data and translating it into actionable insights is difficult when 4TB of raw data is generated every day—the equivalent of the data generated by 3,000 internet users in 24 hours.
- Data Transportation
Autonomous vehicles need to communicate with each other and transport data with the use of consistently high-speed internet, highlighting the need for large-scale adoption of 5G.
- Verifying Deep Neural Networks
The safety of these vehicles will be dictated by their ability to distinguish between a vehicle and a person, but they currently rely on algorithms which are not yet fully understood.
Which Countries are Leading the Charge?
The 20 countries were selected for the report based on economic size, and their automation progress was ranked using four key metrics: technology and innovation, infrastructure, policy and legislation, and consumer acceptance.
The United States leads the way on technology and innovation, with 163 company headquarters, and more than 50% of cities currently preparing their streets for self-driving vehicles. The Netherlands and Singapore rank in the top three for infrastructure, legislation, and consumer acceptance. Singapore is currently testing a fleet of autonomous buses created by Volvo, which will join the existing public transit fleet in 2022.
India, Mexico, and Russia lag behind on all fronts—despite enthusiasm for self-driving cars, these countries require legislative changes and improvements in the existing quality of roads. Mexico also lacks industrial activity and clear regulations around autonomous vehicles, but close proximity to the U.S. has already garnered interest from companies like Intel for manufacturing autonomous vehicles south of the border.
How Autonomous Vehicles Impact the Economy
Once successfully adopted, autonomous vehicles will save the U.S. economy $1.3 trillion per year, which will come from a variety of sources including:
- $563 billion: Reduction in accidents
- $422 billion: Productivity gains
- $158 billion: Decline in fuel costs
- $138 billion: Fuel savings from congestion avoidance
- $11 billion: Improved traffic flow and reduction of energy use
Transportation will be safer, potentially reducing the number of accidents over time. Insurance companies are already rolling out usage-based insurance policies (UBIs), which charge customers based on how many miles they drive and how safe their driving habits are.
Long distance traveling in autonomous vehicles provides a painless alternative to train and air travel. The vehicles are designed for comfort, making it possible to sleep overnight easily—which could also impact the hotel industry significantly.
- Real Estate
An increase in effortless travel could lead to increased urban sprawl, as people prioritize the convenience of proximity to city centers less and less.
With the adoption of autonomous vehicles projected to reduce private car ownership in the U.S. to 43% by 2030, it’s disrupting many other industries in the process.
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.
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:
|Rank||City||Population in Year 1500|
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:
|Rank||City||Population in Year 1895|
|#2||🇺🇸 New York||3,712,000|
|#6||🇷🇺 St. Petersburg||1,286,000|
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:
|Rank||City||Population in Year 2018|
|#6||🇧🇷 Sao Paulo||21,698,000|
|#7||🇲🇽 Mexico City||21,520,000|
|#10||🇺🇸 New York City||18,713,000|
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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