July 21, 2020 – An analysis by Bank of America indicated European and many Asian investors can achieve significant incremental yield over their domestric government bonds by purchasing AAA-rate U.S. taxable municipal bonds, and entering into a cross-currency swap for coupon and principal payments.

As of July 16 rates, Australian and Canadian investors can lock in over 120 basis points of incremental yield for 10 years. For the strongest European credits – Germany and the U.K – investors can still secure close to 90-100 bps over risk-free local rates.

Among the wealthiest Asian countries, three (Japan, South Korea and Singapore) can achieve incremental yield of between 30-60 basis points. China was a notable exception. A holder of 10yr Chinese government bonds would achieve 2.946% yield vs 2.371% yield for taxable munis, adjusted for the currency hedge.

U.S. municipal issuers and their investment bankers have a long tradition of selling bonds to foreign investors, including sovereign entities but also corporates and insurance companies looking for diversification and long-dated bonds.

One of the key barriers to foreign participation in the U.S. municipal market have been currency exposure. BuyMuni was informed by a bulge bracket muni trader that post-Dodd Frank, banks have been less willing to provide long-dated currency swaps although will still do so for the largest European and Asian sovereign-supported institutional clients on a case-by-case basis.

Contact Jumanne Johnson at JJohnson@buymuni.com.