Advisors to the ultra-wealthy steer clients back to bonds

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The sharp selloff in bonds has given investors a rare opportunity to lock in stock-market-like returns without taking on the risk that comes with equities, investment advisors to the ultra-wealthy told CNBC. High-income investors can get extra bang for their buck from buying tax-exempt municipal bonds or using the selloff to harvest tax losses and reinvest in better-yielding debt, according to Jason Katz of UBS.

“I’ve been suggesting to clients that this is, frankly, a generational opportunity to actually create ballast in your portfolio and create income. You need to be a buyer here,” said Katz, managing director and senior portfolio manager at UBS Wealth Management.

Treasury yields rose to their highest levels in more than two decades on Wednesday, with the 10-year Treasury hitting 5.365% and 30-year Treasury bond yields reaching 5.732%. The yield on 10-year Treasuries hit a record low of 0.318% in March 2020.

Katz said the rapid and steep rate movements give investors a chance to buy from the fearful and sell to the greedy. However, some clients are reluctant to invest in bonds given the recent selloff as well as years of low interest rates making bonds unattractive, he added.

“I find myself like all day, every day explaining the dynamic of how fixed income works because up until recently people didn’t have to pay as much attention to it,” he said.

Katz said the potential payoff is compelling. For high-net-worth investors, he estimates that intermediate- and longer-term municipal bonds can now offer tax-equivalent yields within one to two percentage points of the stock market’s average return, without taking on the same level of risk. Katz said that short- and intermediate-term bonds provide the most bang for your buck.

Kriti Gupta, executive director, global investment strategist at J.P. Morgan Private Bank, recommends exposure across the maturity curve. Gupta said that the bank is neutral on bonds, but that high yields provide “a compelling entry point.”

“We are not pounding the table and saying buy, buy, buy,” she said. “We’re saying you should be exposed across the board. And if you’re sitting in cash — which a lot of clients are, by the way — and you’re looking for a moment to enter the market, this could be a moment to do that.”

Gupta highlighted the tax-efficiency and value of municipal bonds to high-income investors, saying they are the cheapest they have been since at least 2011.

Yields on top-rated 30-year municipal bonds reached 5.13% on Oct. 1, according to Nuveen. For investors subject to the top federal tax rate and net investment-income tax, that was equivalent to an 8.67% taxable yield on a taxable bond, the investment manager estimated.

Mike Silverman, chief investment officer at Cresset, noted that high credit quality is crucial, saying he wouldn’t go below AA-rated municipal bonds.

He added that duration recommendations should be based on the client’s financial goals and liquidity needs rather than yields. The broader objective, Silverman said, is to build a portfolio that clients can stick with through market swings.

“You have to design a program for your clients where they will never be a forced seller, because that’s how you destroy wealth,” he said.