European/Asian insurers urged to consider allocations to US taxable muni bonds

Written by Adam Cadle

01/04/2022

European and Asian insurers would do well to now consider an allocation to US taxable municipal bonds, new research published by DWS has argued.

DWS said this asset class offers high credit quality although US taxable municipal bonds are considered as part of the investment-grade (IG) credit spectrum; attractive yields compared to the IG credit spectrum and the credit risk taken; high coupon income available for cash flow matching purposes; long duration availability, which is appealing to insurance companies considering liability matching considerations; and low default rates and sector diversification compared to corporate bonds.

On the ESG front, the research stated “as the demand for sustainable investment and ESG-related mandates grow globally, US municipals can offer a wide range of qualifying bonds to match investor’s objectives whether it is sustainable or impact investing or simply ESG risk-mitigation”.

“The majority of municipal bond issuance is for the greater good of society in the issuers’ respective geographic regions. In addition, a focus on carbon emission reduction is a key theme in the municipal market with many issuers launching efforts for carbon neutrality and other low carbon initiatives such as electric vehicle adoption.”

Under various solvency regimes across Europe and Asia, in most cases, municipal bonds hold favourably on the balance sheet requiring lower capital charges than some other fixed income sectors, DWS added.

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