As investors consider opportunities for their portfolios in 2026, our team at Davidson Investment Advisors would like to highlight one such asset class we view as particularly attractive in today’s market: Municipal Bonds. For high tax bracket clients, we believe today offers an attractive entry point, and our actively managed, tailored approach is well positioned to serve clients for the following reasons:
1. High Tax-Equivalent Yields
Taxable-Equivalent yields for high-quality municipal bonds in the 15–20-year portion of the curve remain well above 6% and surpass that of even lower-rated corporate alternatives. We believe investing at these yield levels will help support long-term income for our portfolios. Additionally, our suite of state-specific and state-preferred solutions can help further enhance clients’ experience in our managed portfolios.
2. Opportunity for Price Appreciation
“Roll-Down” or the falling of yield as a bond gets closer to it maturity date, can be a particularly powerful return driver in a positively-sloped yield curve environment. All else equal, a bond’s yield will decline as it becomes shorter, and its price will rise correspondingly. The chart to the right shows municipals with maturities from approximately 10-20 years currently present the most “roll” potential for investors, offering between 10-15 bps of yield decline for each year a bond is held.
3. Attractive Valuations
Municipal to U.S. Treasury ratios are often used as a gauge of relative value for tax-exempt investors. In today’s market, we see that municipal bonds from approximately 15-25 years continue to display ratios that are higher than both their 3- and 5-year averages. In the maturity range of 15-20 years those ratios are around 80% of US Treasury yields. We are actively seeking opportunities to invest client money in this space through the deployment of cash, swaps of existing holdings, and through the reinvestment of maturities.
While we find municipal bonds attractive generally, we also highlight the opportunity for clients to receive additional value through an actively managed approach. Our team specializes in credit research and surveillance, has access to a broad inventory of investment opportunities, and manages client portfolios with regard to duration and structure to seek performance above and beyond what can be achieved through a passive or laddered approach. Given dislocations across the yield curve today, we believe that such an approach is positioned well to add value. We also remain committed to our team’s process of building highly tailored state-specific portfolios so that clients can receive the benefit of both federal and state tax-exempt portfolios where such opportunities exist.
Davidson Investment Advisors is a SEC registered investment advisor. The opinions expressed herein are those of Davidson Investment Advisors and are subject to change.
The information contained in this presentation has been taken from trade and statistical services and other sources, which we believe to be reliable. We do not guarantee that this information is accurate or complete and it should not be relied upon as such.
The figures represented assume a top federal tax rate of 40.8%. Tax rates may vary depending on client’s state of residence and income, and the figures represented should not be Davidson Investment Advisors does not provide tax or legal advice.
The information should not be relied upon as accurate or representative of any particular client’s tax situation. This presentation is for informational and illustrative purposes only, and is not intended to meet the objectives or requirements of any specific individual or account. Past performance is not an indicator of future results. All investments involve risks. An investor should assess his/her own investment needs based on his/her own financial circumstances and investment objectives.