News Release
The Bright Side of Muni Market Volatility: Tax-Loss Harvesting
Tradeweb
The uncertainty around the timing of interest rate hikes these past two years has created an opportunity that municipal bond investors haven’t seen in a decade – gaining by losing. What we mean is tax-loss harvesting, a strategy rarely available to this market given munis’ historic stability and, more recently, the extended bull market run in bonds that preceded this latest Fed tightening cycle. Now, with less than a month left before year’s end, we’re seeing strong evidence that institutional and retail investors are taking advantage of recent yield volatility to book these advantageous losses. The volume of bid wanted lists on the Tradeweb platform spiked in November and continues to run 70% higher than August year-to-date activity, prior to the temporary blip in municipal bond performance. Through the first eight months of 2023, total returns in the muni market were positive, so tax-harvesting as a widely available strategy stayed on the shelf. However, with the market losing more than 3% in October and turning negative for 2023, investors could again consider the strategy to manage tax liabilities while dumping underperforming bonds. Investors had a similar opportunity to pursue tax-loss harvesting at the end of 2022, set up by a comparable spike in yields last September. A surge in activity For those who haven’t been around munis long enough to experience past downturns, tax harvesting might be an unfamiliar concept. The idea is simple tax management - investors sell securities with unrealized capital losses to offset realized capital gains. Those losses that exceed the gains in a given year can be carried forward to offset gains in future tax years. Since September, we have seen institutions and retail investors alike pursuing the strategy in earnest. Evidencing this trend, users of Tradeweb Direct’s Portfolio Solutions analytics suite conducted holdings searches to identify municipal positions with unrealized losses in the month of September at a clip 82% higher than in the preceding eight months. What’s more, muni bid wanteds routed through Tradeweb Direct have also spiked, with October sell inquiries 65% greater than the August year-to-date average and November liquidation requests soaring 70% above that level. Retail is on board Given the dynamic role and high levels of participation of retail investors in the municipals market that’s not at all surprising. Retail investors are crucial to creating a high-functioning muni market and have themselves become more sophisticated, active market investors. They own roughly 60-70% of all municipal bonds outstanding, and are no longer just the buy-and-hold investor of last resort. Through advances in electronic trading, they’ve gained a direct conduit to the institutional sell side, and represent a big pool of market liquidity in both volatile and stable markets. The tricky part of tax-loss selling for any investor comes when it’s time to reinvest. While buying similar securities - often to maintain portfolio allocations - is ok, IRS “wash rules” prohibit the purchase of substantially the identical investment within 30 days before or after the sale. Because liquidity in the muni market is largely driven by available inventory, finding a similar replacement manually for the asset that was sold can sometimes be a challenge. There are tools, though, that can help with the transaction and with locating a qualified replacement. Leveraging the Portfolio Solutions analytics suite on Tradeweb Direct, investors can pursue tax-loss harvesting electronically, using features that support the end-to-end workflow of the strategy. Here’s how to get started: 1) Identify your loss candidates 2) Add a swap candidate to a restructuring proposal 3) Add a replacement candidate to the proposal 4) Generate a client-facing transaction report As we’ve seen through periods of bond market volatility these past two years, sudden swings in yields present opportunities to use negative returns to your advantage. The windows open and close quickly, so being prepared, with the tools to enable fast execution, is essential. With year-end approaching and interest rates top of mind, it’s important to stay vigilant and move on tax-loss harvesting possibilities when they are available. To learn more about Tradeweb Direct’s capabilities and how we can assist you in your trading strategies, visit: https://www.tradeweb.com/our-markets/tradeweb-direct-middle-markets--retail/. Written by: Bill Buzaid, Managing Director, Head of Sales & Relationship Management, Tradeweb Direct and Alexandra Isayev, Director, Head of Portfolio Solutions Product, Tradeweb Direct © 2023 Tradeweb Markets LLC. The information contained herein is proprietary and may not be copied or redistributed without the prior written consent of Tradeweb Markets LLC. The content of this publication is for informational purposes only and is not offered as investment, tax or legal advice, or an offer to buy or sell securities. The information is provided “as is” and to the fullest extent permitted by applicable law, all warranties and representations are disclaimed. About Tradeweb Markets Tradeweb Markets Inc. (Nasdaq: TW) is a leading, global operator of electronic marketplaces for rates, credit, equities and money markets. Founded in 1996, Tradeweb provides access to markets, data and analytics, electronic trading, straight-through-processing and reporting for more than 40 products to clients in the institutional, wholesale and retail markets. Advanced technologies developed by Tradeweb enhance price discovery, order execution and trade workflows while allowing for greater scale and helping to reduce risks in client trading operations. Tradeweb serves more than 2,500 clients in more than 65 countries. On average, Tradeweb facilitated more than $1.2 trillion in notional value traded per day over the past four quarters. For more information, please go to www.tradeweb.com. Forward-Looking Statements This release contains forward-looking statements within the meaning of the federal securities laws. Statements related to, among other things, our outlook and future performance, the industry and markets in which we operate, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions and future events are forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed under the heading “Risk Factors” in documents of Tradeweb Markets Inc. on file with or furnished to the SEC, may cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this release are not guarantees of future performance and our actual results of operations, financial condition or liquidity, and the development of the industry and markets in which we operate, may differ materially from the forward-looking statements contained in this release. In addition, even if our results of operations, financial condition or liquidity, and events in the industry and markets in which we operate, are consistent with the forward-looking statements contained in this release, they may not be predictive of results or developments in future periods. Any forward-looking statement that we make in this release speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this release. Contact Details Tradeweb Media Contact Daniel Noonan +1 646-767-4677 Daniel.Noonan@Tradeweb.com Company Website http://www.tradeweb.com
December 06, 2023 09:51 AM Eastern Standard Time
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