Advisors to the ultra-rich are bringing their clients back to bonds

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The sharp decline in bonds has given investors a rare opportunity to lock in stock market-like returns without taking on the risk associated with stocks, investment advisers to the ultra-rich told CNBC. High-income investors can get more bang for their buck by buying tax-exempt municipal bonds or using the sale to harvest tax losses and reinvest in higher-yielding debt, according to Jason Katz of UBS.

“I suggested to my clients that this is frankly a generational opportunity to really create ballast in your portfolio and create income. Here you have to be a buyer,” said Katz, a 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 Cash flow at 10 years reaching 5.365% and Cash flow over 30 years bond yields reach 5.732%. The 10-year Treasury yield hit an all-time low of 0.318% in March 2020.

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

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

Katz said the potential benefits are compelling. For wealthy investors, he believes that mid- and long-term municipal bonds can now offer tax-equivalent returns of between one and two percentage points of the stock market’s average return, without taking on the same level of risk. Katz said short- and medium-term bonds offer the best value.

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

“We’re not pounding the table and saying buy, buy, buy,” she said. “We say you need to have exposure at all levels. And if you have liquidity – which many clients do – and you’re looking for a time to enter the market, this could be the time to do it.”

Gupta highlighted the tax efficiency and value of municipal bonds for high-income investors, saying they are the cheapest 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 the net investment income tax, that equated to a taxable yield of 8.67% on a taxable bond, the investment manager estimated.

Mike Silverman, chief investment officer at Cresset, stressed that high credit quality is crucial, saying he would not 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 returns. The broader goal, Silverman said, is to build a portfolio that clients can hold despite market fluctuations.

“You have to design a program for your customers where they are never going to be forced sellers, because that’s how you destroy wealth,” he said.