Citi Global Wealth PUTTiNG YoUr CASH To worK iN A HiGHer rATe eNviroNMeNT | | 37 Investments US municipals Historically, issuers have always refinanced not to return principal to investors, most of preferreds when interest rates were falling these securities – which were issued when rates For investors eligible for the tax advantages, rather than rising. As such, investors who were much lower – would see their coupons highly rated US municipals (“munis”) may be an received principal back today would have an either float or get reset at higher coupon levels. interesting short-term fixed income opportunity. opportunity to reinvest money back into the Preferreds can be bought both individually and Munis generally pay a “tax-equivalent yield” market at much higher yields. If issuers choose through funds. near the equivalent Treasury yield – FIGURE 5 – but sometimes that tax-adjusted yield can be FiGUre 4. MUNi YieLDS Are ATTrACTive For TAX-ADvANTAGeD iNveSTorS higher than Treasuries, as it was earlier this year. When that occurs, the tax-equivalent yield, especially for US taxpayers in high-tax states, 14 2yr AAA-rated muni yield (TEY) can offer similar yields to investment grade, for 12 government credit risk. Muni Swap Index yield (TEY) 2yr US Treasury yield Floating/short-callable 10 preferred securities ) 8 % ( Investment-grade preferred securities may d l e also add yield to portfolios, albeit with some i 6 Y additional risk. These securities are typically issued by banks, utilities and insurance 4 companies. If the issuer went into liquidation, preferred holders would rank below owners of the company’s senior debt but just above equity 2 owners when it came to repayment. By design, most global preferred securities 0 do not have a maturity date. However, most '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 variable-rate preferred securities have the right to return principal to a preferred investor on a Source: Bloomberg, as of 23 Nov 2022. Note: Tax-equivalent yields (TEY) adjust for top Federal and Affordable Care Act tax rate (40.8%). The pre-determined “call” date. What if the issuer SIFMA Municipal Swap Index is a 7-day investment-grade market index comprising tax-exempt VRDOs reset rates that are calculated weekly. All chooses not to call in the security and return forecasts are expressions of opinion, are subject to change without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of principal at that time? Future coupon payments any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no will either float in line with a benchmark such as guarantee of future results. Real results may vary. See Glossary for definitions. The information contained herein is not intended to be an exhaustive SOFR or would be reset at prevailing Treasury discussion of the strategies or concepts mentioned herein or tax or legal advice. Readers interested in the strategies or concepts should consult yields. The details depend on the issuer and the their tax, legal or other advisors, as appropriate. preferred involved. Chart shows the yields on municipal bonds and 2-year US Treasuries between 2000 and 2022.