Enlightenment - A Herold & Lantern Investments Podcast
Enlightenment - A Herold & Lantern Investments Podcast
Dollar Dominance Under Threat: How Currency and Bond Markets Signal Economic Shifts
April 14, 2025 | Season 7 | Episode 14
The financial world stands at a potential inflection point as traditional market relationships show signs of stress. What began as concern over tariff policies has evolved into a deeper question about the stability of the global monetary order that has prevailed since World War II.
The bond market flashed dramatic warning signals last week, with the 10-year Treasury yield surging nearly 50 basis points to touch 4.5% - the largest percentage move since 1987. Former Treasury Secretary Larry Summers likened the chaotic trading to what might occur in an emerging market economy. Simultaneously, the U.S. dollar weakened significantly against major currencies, with the Euro gaining over 10% against the dollar since January.
Ray Dalio, founder of Bridgewater Associates, expressed concerns about "something worse than a recession" as these tectonic plates of finance shift beneath our feet. For decades, global investors have flocked to U.S. assets, allowing America to run substantial deficits with minimal consequences. That relationship now faces its most serious test in generations.
Beyond market mechanics, this volatility reflects real economic challenges facing average Americans. While wages have increased roughly eight times since 1967, housing costs have surged eighteen times over the same period. This widening gap between income growth and essential expenses explains why many Americans feel financially stretched despite stock market gains.
For investors, especially those approaching retirement, these conditions demand thoughtful portfolio management. Maintaining adequate cash reserves, strategic tax-loss harvesting, and considering Roth conversions during market downturns can help navigate uncertainty. The municipal bond market presents a particularly compelling opportunity, with high-grade 30-year munis yielding around 5% - equivalent to a 7.7-9.5% taxable yield for investors in high tax brackets.
As we process these signals, the fundamental question remains: are we witnessing temporary market dislocations or the early stages of a more profound shift in global economic relationships? Either way, maintaining perspective and adhering to sound investment principles will be essential in the months ahead.
** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.
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And now introducing Mr Keith Lanton
Keith Lanton:Good morning. Today is Monday, April 14th. Certainly a lot going on in this world here. As we approach tax day tomorrow, April 15th, I want to remind all listeners that we have one more day left to make contributions to IRAs, roth IRAs. To make contributions to IRAs, Roth IRAs perhaps a great time to get money into accounts and to start thinking about being able to deploy that capital, as we have lots of uncertainty, perhaps some opportunities to take advantage of what we're seeing in the marketplace, certainly seeing lots of volatility in equities and we are seeing increased yields in the US fixed income.
Keith Lanton:We're going to talk about all of those factors. We're going to talk about what we're seeing taking place in financial markets tariffs, tariffs on, tariffs off. What's taking place in the equity market? What's taking place in the bond market? This morning, we are seeing futures higher. Is this a trend? Is this a sustainable upswing in equity markets or is this one move up before a bigger move down? Of course, no one's got the crystal ball, but we'll talk about the probabilities, the percentages.
Keith Lanton:Most important thing is to remain focused on your equity allocation, your fixed income allocation and, perhaps for the first time, your US dollar allocation, how much you might want to think about investing in the United States versus should you have any diversification into other currencies or countries. As we are seeing, us dollar supremacy being challenged for the first time in a long time doesn't mean that things are going to fundamentally change, but what we are seeing is that there is that possibility as we see asset flows moving to what's perceived to be some of the competitors to the US dollar Swiss franc, japanese yen, euro, perhaps Chinese renminbi, perhaps Chinese renminbi and we will talk about the effects of folks as they reconsider dollar supremacy and what that might mean for the United States and whether or not this is just a temporary blip or whether or not this is something that we need to really focus on and be more attentive to. So asset allocation critically important. Make sure you're comfortable. We're going to talk about those of you who may be at or near retirement to go over once again how you want to think about positioning your portfolio. Perhaps you went into this thinking that you were well positioned, that you had enough cash, and perhaps you are rethinking that, and we'll talk about that and what you might be able to do if you're in a scenario where you're feeling queasy or uncomfortable. So one of the things that we saw last week was a significant increase in the treasury yield. We saw the 30-year treasury touch 5%. We saw the 10-year treasury go from 3.99% all the way up to almost 4.5%, a 50 basis point move, the biggest move in the 10-year treasury since 1987 on a percentage basis. This is significant. This is meaningful. This is the type of thing that you need to reflect on and we're going to talk about that.
Keith Lanton:Perhaps the greatest thought process behind this is that the US debt does not matter until it matters. We've talked before. There was a theory during the beginning of the Biden administration about modern portfolio theory, modern monetary theory. This says the US basically could run deficits as high as we want and it doesn't matter. That theory is not talked about anymore. I don't think it has a lot of credibility or credence. Certainly, at the moment, the amount of debt that we have certainly does matter.
Keith Lanton:Whether or not the amount of debt we matter was triggered by the fact that we ran up a lot of debt and therefore we're running a very large deficit, which is very different, mind you, from the deficit we have going on with our capital account. Capital account is the deficit that we're running with the rest of the world when it comes to trade. Not to confuse the two, we've got two deficits going on. One is the trade deficit and one is the amount of money that the US is borrowing on an annual basis and a cumulative basis, which is what we think of as our federal deficit. And why has the US been able to run big federal deficits? Well, the reason we'd be able to run those deficits is because the rest of the world was really comfortable owning US assets. The rest of the world was very happy to take on a lot of the debt that the United States issued. So the fact that we spent more every year than we generated from revenues as a country whether it be from the IRS or from tariffs or whoever it is, the government is taking in revenue. We were spending more every year and as that piles up and as the interest on that piles up, we run a federal deficit every year, which accumulatively winds up to be the $35, $36 trillion that we currently owe.
Keith Lanton:But, as I mentioned, the rest of the world was, up until recently, more than happy to buy our debt. In fact, it could be argued that the demand for our US debt, whether it be our bonds, whether it be our currency, cash, which is a form of debt. Well, the demand for that was very strong, which is why our interest rates were very low, because one of the things that folks do when they buy their dollars is they buy our treasuries. So the demand for US assets was greater than the supply, and that's perhaps one of the reasons that the stock market was so strong as well. Foreigners that want to hold dollars. Well, they also want to hold their dollars in the forms of stocks and bonds, and some of that now is being called into question, as the United States is viewed perhaps less as a stable force, where we have what's going on currently, which is our tariff policy, which is arguably. Maybe there's a thought process behind it, maybe there's a plan, but at the moment, it's viewed as very desultory. In other words, it doesn't seem to outsiders to have a clear measure.
Keith Lanton:And where we stand today is we stand today in an economy where we're looking at 10% tariffs across the board? We're still seeing tariffs of 25% on Canada and Mexico, when it does not apply to USMCA goods. Those are goods that were exempt based on President Trump's first administration, the agreement he worked out with Canada and Mexico, goods that fall within there still are not being subject to tariffs. We also have 25% tariffs on steel and aluminum, as well as automobiles, and, of course, we have 145% tariffs on the Chinese now, just this morning. One of the reasons that futures are up this morning and we'll talk a little bit more about this is because over the weekend there was an announcement that the United States was going to exempt some other products from tariffs, these being telephones, so iPhones, apple stock up significantly this morning. Also semiconductors, chips, electronics going to be exempt, computers going to be exempt. But then this morning an additional announcement from the US that these products will not necessarily be permanently exempt but perhaps will fall under their own category, like what we see in cars and aluminum and steel. So we may see a different tariff rate on these products than the 145% that we're seeing from China, but it may not be zero permanently.
Keith Lanton:So some persistent uncertainty. So over the weekend, ray Dalio, the founder of the world's largest hedge fund, bridgewater, said he was worried about something worse than a recession. Than a recession, he said that the US's changing tariff policy could contribute to a problem that has been brewing. But now, in my own words, this brew may come to a boil. What Ray Dalio has said is that he is concerned about the monetary order. And if you're worried about the monetary order, what do you look at? Well, just sort of like a patient in the emergency room, you check the vitals of the monetary order that's been in place since World War II, and those vitals could be considered the currency market, the state of the dollar and the bond market, the state of the debt markets here in the United States.
Keith Lanton:And, to use a metaphor, when you think about the US asset markets, what we could do is we could take a look at the US stock market and think of it as being built, let's say, on land, and the stock market are the structures that are being built here in the United States on that land. And then, to continue this metaphor, we as humans typically focus what's on the land, what's above ground, and that's equities and that's where we generally live a lot of our lives. However, those structures are built on earth and you can think of the bond market and the currency market as that solid ground, and we generally take that solid ground for granted, and you generally take that solid ground for granted until suddenly that solid ground doesn't seem so solid. Perhaps you think of it as some tremors taking place on that ground that could potentially give way to an earthquake ground that could potentially give way to an earthquake. And perhaps where we are now is we are at that point where we're getting some warning signs from the bond market, where those tectonic plates perhaps not causing any dramatic damage on the surface, but we are getting rumblings and the concern is growing that this rare event of an earthquake may be starting to show here in the fixed income and the currency markets. And if that were to happen, well, it could reverberate in a more concerning way to those structures above ground as these plates bump against each other and as the bond market exhibits stress, as I mentioned, 10-year Treasury yield, which is improving a little bit this morning, but all the way up from 4% to 4.5% last week. And for those who study bond markets, they are aware that this is a huge move and it could precede a more thundering event. In addition to the bond market, that other market that doesn't get as much attention, and Americans may soon start to think about this market as their purchasing power in the rest of the world starts to decline, and that is the currency market which has also been exhibiting weakness, and significant weakness in a short amount of time.
Keith Lanton:Currency markets generally don't move very fast. But to give a little perspective, the dollar against the euro on January 5th was trading at around 1.02. In other words, $1.02 would get you one euro. Well, if you're heading over to Europe or you're buying some European products, well, you now need $1.14 to buy what before would have cost you $1.02. So you're talking about a move up of over 10% in terms of what it's going to cost you to go stay at a hotel in London, let's say, versus where you were three months ago. So you are seeing a significant decline in the dollar increase in the euro London. Not a great example. They're still on the pound, but let's say you're going to Paris instead of to London.
Keith Lanton:Same token or same currency Japanese yen was at and this currency is before 157 yen equaled $1. Now it's only 143 yen. Swiss franc it was against the dollar. Before $1 was the equivalent to 90 cents in Switzerland. Now it's the equivalent to 81 cents in Switzerland. Now it's the equivalent to 81 cents in Switzerland.
Keith Lanton:So the bond markets and the currency markets demonstrate concern with not only holding dollars but holding dollar-based assets. And that's perhaps one of the reasons that we're seeing weakness here in the US, perhaps foreigners reconsidering some of their exposure to the US and at some point that could mean that we consider also our exposure to the US and think about owning other assets outside the US. We've been so US-focused here as Americans and say you know what holding stocks could potentially offer better protection of a downturn than holding something that's fixed income on a forward-going basis, despite all of the uncertainty. And why is that the case? Well, the bond market is comprised of fixed payments generally. Let's assume a fixed payment bond. So if you're in a fixed payment instrument, let's say you've got a bond and it's paying you a interest rate of 4% and you're locked in for the next 10 years.
Keith Lanton:And you've got suddenly, perhaps because of tariffs or other factors, suddenly you've got inflation, and US inflation expectations last week picked up dramatically. So let's say you do have inflation, consumers are now expecting it. You get inflation of 7%. Well, you're going to get 4%. You know that for sure. And at the end of the day you are going to have inflation run at 7%. Well, what does that tell you? That tells you that in terms of purchasing power, that you've lost 3% even though you were in 4%. So you invest $100,000, you get $4,000 a year, but at the end of the year the fact that you were in $400 doesn't keep up with the fact that you've really lost 7% of your purchasing power. You lost $700 worth of purchasing power, so at the end of the day, you're $300 poorer in real terms.
Keith Lanton:Now it's possible that if you own stocks, that perhaps because of this inflation, if you own companies that have pricing power big F something you got to think about going forward, do you? If you own companies that have pricing power, well, those companies are able to potentially price pass that price along to the consumer, so you have a chance of seeing those companies have their earnings increase. So let's go back to that 7% inflation example. If that company is able to increase their prices by 7%, well then their earnings will increase by 7%. If their PE ratio stays the same, it's arguably possible that that stock price all else being held constant could participate and hold steady in an environment like that if you have a company that can pass on those price increases Something to think about. If you have companies that cannot pass on those price increases or, in fact, may even see increasing costs and not being able to pass on price increases. Well, those companies are going to get hit twice they're not able to pass on the price increases, so their real earnings are going down and their costs are going up. So this is a scenario where companies that can't pass on those price increases could perform even worse than bonds. So something that we need to focus on even more than in the past. It's always important to know which companies can pass on price increases, because they're generally leaders, but nevertheless, if they can't pass on those price increases, they've got a bigger problem now than they did before. So let's talk about prices, let's talk that inflation, and therefore they felt like they were slipping behind and wanted a change.
Keith Lanton:And I was given by my aunt over the weekend one of those books that you might see in a card store, which is kind of the year you were born Not to give away my youth, but I was born in 1967, and this got me thinking. What was taking place in 1967 versus what do things look like today, and why do many Americans feel that they're not keeping up? Well, in 1967, the average annual income was around $8,000 a year. Today the average annual income rounding this a little bit is about $64,000 a year. So the average annual income is up about eight times in the last 58 years. The average house in 1967 cost $22,700. Let's call that $23,000. If you were to take that $23,000 and multiply it by that eight times, which is how much wages have gone up, well, a house would cost $184,000. But today an average house costs $410,000.
Keith Lanton:One of the reasons perhaps that many Americans are feeling left behind, one of the reasons that people are agitating for change, despite the fact that the Americans in the stock market are doing really well, or at least had done very well up until recently. Well, folks who wanted to buy a home, just getting started, it's more than twice as hard as it was 58 years ago than it is today. And if you're thinking about well, maybe I'll rent an apartment but I'll buy a car, a nice new car, well, in 1967, a car costs about $3,000. You take that eight times growth in wages and you'd say, well, a car today would cost around $24,000. But an average car costs about $40,000 today. So a car, while not quite as steep of an increase as a house, still about eight times, 13 times, more expensive versus the fact that your wages are up about eight times.
Keith Lanton:So you may say you know what. I'll drown my sorrows and just enjoy some entertainment. I'll go to the movies. Well, movie ticket back in 1967 was about $1.20. Wages are up eight times since then. So the equivalent would be about $9.60. I don't know, I guess it depends where you live, but here in New York it's going to cost you $15 to $20 to get into a movie. So again, cost of living significantly greater than what it's costing you on a day-to-day basis. And that's one of the reasons that many Americans are feeling lots of pain today and agitating for change.
Keith Lanton:If you want to look for an area where prices have basically moved in lockstep with inflation or in some cases, even consumers have seen some benefit, and that would be, interestingly, food and clothing, which make up a smaller percentage of American spending, but certainly essential items. So an item like milk was $1.15 fora gallon of milk back in 1967, which would be about $9 today. That milk is probably closer to $4 to $5 today. So milk will cost you less. Eggs, certainly something that many of us have focused on recently. Eggs were about 50 cents a dozen back in 1967. You take eight times and you're at about $4 a dozen, which is pretty much close to I mean, obviously price of eggs bouncing around a lot, but relatively close to where you might be able to, if you're lucky, buy a dozen eggs. So even though eggs have moved up a lot recently, they're still relatively in line, although they certainly had been cheaper previously.
Keith Lanton:So with that as our backdrop, let's take a look at what's taken place here this morning. We'll talk a little bit about Barron's. Brad will not be on the call so I will talk about the bond market. I will certainly talk about the municipal bond market as well as the treasury market, which we've talked about had sold off last week, while the municipal market's also been selling off and, I think, presenting some opportunities. And I know Brad and I have been talking and he sees opportunities there as well. So we'll talk about that First.
Keith Lanton:We're going to go back up to take a look at markets this morning. To go back up to take a look at the markets this morning, futures are higher, as I mentioned on that boost to tech stocks as a result of the at least hiatus on tariffs on certain electronic goods Dow futures about 430 points over fair value. S&p futures about 85 over fair value. Nasdaq futures the biggest percentage gainer, for obvious reasons up about 360 points over fair value. Nasdaq futures up almost 2 percent. Dow futures up about 1 percent. Treasury yields this morning are lower. The 10-year yield is down about 6 basis points to 443. Two-year yield is down 4 basis points to 3.91 percent%. We did get earnings this morning from Goldman Sachs. They topped estimates on a boom in equities trading revenue. So Goldman, following on the heels of JP Morgan and Morgan Stanley, posting better than expected earnings and a lot of that having to do with the move up in trading revenue. Here, as we see, obviously significant volatility and these firms seem to be benefiting from that volatility.
Keith Lanton:Apple stock this morning, one of the big beneficiaries of the delay or the halt at the moment for those tariffs on those iPhones President Trump exempting reciprocal tariffs storage devices, other electronics Apple beneficiaries. So stocks trading around $2.09, up about $11 this morning. Intel this morning expected to announce that they are going to sell Altera, which is a chip company that they bought several years ago and expected to sell that to Silver Lake. Intel acting positive to that news and the stock there is up about 3% or $0.60. One banking stock that missed estimates down modestly is M&T Bank, mtb doing a lot of lending to small and mid-sized businesses.
Keith Lanton:Other news this morning Bloomberg reporting that the US and Japan will hold talks on Thursday and Japan is not expected to use their treasury holdings. Japan actually is the largest holder of US treasuries. It's not China anymore Not expected to use those treasury holdings as leverage in talks. Washington Post reporting that the Trump administration is expected to begin trade negotiations with dozens of countries with goals of more energy purchases, lower export tariffs, lower trade deficits and lower taxes on American technology companies. Cnn reporting that the US and Iran, which had the direct talk on Saturday, that those talks were constructive and that they plan further nuclear discussions this week. Cnbc reporting that the tariffs on autos could lower sales by millions of vehicles. Financial Times saying that President Trump's planning an executive order that could help the US stockpile critical minerals. This after China retaliated against the US trade policies by restricting certain essential minerals from being exported to the United States. The UK government saying they're going to work to cut prices of everyday items and summer essentials. Taiwan's president said the first part of US trade talks went smoothly.
Keith Lanton:That, according to Reuters, markets overseas generally to the upside Asia-Pacific region Hong Kong up about 2.5%, japan up 1%, china was up about 1%, australia up a little over 1%. Taking a look at Europe, we're seeing markets there up in the neighborhood of around 2% in Europe. What's going on this week? Well, a lot that we don't know yet, but let's take a look at what we do know is going on this week. We have Netflix out with their results on Thursday, expected to post a rise in first quarter revenue as they continue to add more subscribers to its lower-priced, ad-supported tier. Also scheduled major American bank lender, bank of America, expected to report a drop in first quarter profit, hurt by the increased loan loss provisions to guard against a series of potential defaults as the economy gets volatile, against a series of potential defaults as the economy gets volatile. Citigroup also expected to report and they're expected to report a jump in earnings on Tuesday. Everybody, of course, will be focused on all of these companies and talking about tariffs and increased costs and what effect that's going to have on their business.
Keith Lanton:US central bankers we have a busy week ahead with bankers speaking. Most notable is Fed Chair Powell expected to speak on the economic outlook at the Economic Club of Chicago on Wednesday. On the US economic calendar retail sales on Wednesday looking for those to increase 1.3 percent in March, excluding sales of autos. Retail sales expected to edge up two-tenths of one percent, which would be down from three-tenths last month. Also, again, industrial production that's supposed to come in down three-tenths of one percent. Capacity utilization expected to come in at 77.9. On Thursday, weekly jobless claims coming out Also this week. On Tuesday, import prices for March those are expected to be flat. And we also get some housing data. On Thursday, housing starts likely came in at 1.42 million units. That would be down from about a million and a half in February. And we also get the report on building permits as well.
Keith Lanton:So all this volatility, what to do? Barron's talked about two moves that retirees can make now to protect their portfolios. One thing that Barron's suggested is when markets are going haywire like they did over the last couple of weeks, especially a couple of days in particular perhaps, when things are going haywire and you don't know why they're going haywire, or you don't know where they're going to land, perhaps the best strategy is to do nothing, but to have a strategy when things reach a more stable point. So markets last week demonstrated that if you did take action when markets were going haywire and you sold the rally, you would have missed out on a historic gain last week when the S&P gained about 10% on Wednesday. It was a 474-point gain, largest one-point gain in the S&P on record. Also the biggest increase in market capitalization, about $5 trillion.
Keith Lanton:But, as we've talked about, it is too early to call all clear. Lots of tariffs remain in place, volatility remains elevated, policies changing pretty much daily, bond market remains on edge and the decline in fixed income prices certainly has caught many off guard and probably producing more questions than answers, but certainly also adding to the angst of retirees who hold bonds to hopefully offer ballast to their portfolios of us, to have some shock absorbers into our portfolio and make sure that we are prepared that, if the markets take another lug down, that we can withstand that volatility. So what to do? Well, check your cash cushion. Many advisors recommend that retirees hold between one and two years worth of portfolio withdrawals in cash. This is money you need to meet essential expenses after factoring in Social Security and other income sources. A cash cushion can help you ride out the market volatility without touching your stock portfolio.
Keith Lanton:The average bear market, which is characterized by declines of 20% or more lasts between 9 and 10 months, and it is best if you can wait it out without selling stocks when they are down. Of course, the optimal mix of stocks and bonds is a personal mix based on your personal risk tolerance and your ability to withstand variability. Whatever your target mix, especially a day like today where we're seeing markets higher, it is not too late to de-risk your portfolio. If you are thinking of de-risking, you want to do it when things are better than when they are worse. Many retirees may have more equities in their portfolio than they did a couple of years ago because, despite the fact that markets have sold off, they are still significantly higher than they were. So it's very possible that your equity allocation increased significantly in the last few years, and perhaps you haven't done that rebalancing and if you are growing increasingly concerned, well, you still have an opportunity to do that. Markets are still a lot higher than they were. Of course, we have no way of predicting what the next day or the next hour even will bring, so it is fine to proceed slowly in terms of reallocating your portfolio, selling a little at a time over days or weeks, to reach your target allocation.
Keith Lanton:Now, one silver lining of a down market is it does offer opportunities for advantageous tax moves. This is something Brad has talked a lot about in the bond market. But it's not just the bond market. Currently, you can sell depreciated securities, lock in the loss to offset future capital gains. Take some of those lemons, turn them into lemonade. If you've got bonds that are down in value, you can sell that bond and you can buy a very similar bond. So your cash flow can be almost identical, your rating can be almost identical and you can recognize a loss and, from an asset allocation standpoint, be sitting in almost the exact same spot that you were in before. So that opportunity is something you may want to think about taking advantage of in the current marketplace. Also, if you've been thinking about doing a Roth IRA conversion, well, roth conversions result in taxes. Whatever you convert in your Roth to a IRA is considered taxable income. So before you had X and now you got 0.8X, well, you've got 20% less in tax to pay if you do that Roth conversion. So you might want to think about revisiting the idea of whether or not it makes sense to do a Roth conversion. All right, I'm going to move on.
Keith Lanton:Talk a little bit about the bond market and then conclude. So we talked about the bond market flashing some warning signs. To reiterate, the yield on the benchmark 10-year Treasury note rose almost a half a percentage point Huge move. Last week, chaotic trading Former Treasury Secretary Larry Summers liked it to an occurrence that might take place in an emerging market economy. Again, the 30-year Treasury yield came close to 5% last week before pulling back and is sitting in the 485 to 490 range. But what may matter more than anything is the action in the bond market, because yields arguably should be falling, given the fact that we had good inflation readings last week. We see falling consumer confidence and we see signs of a weakening economy. Other concerning signals for investors are the sharp rise in gold prices, which hit a new record on Friday, and something we've talked about in the weakness in the dollar, which fell to its lowest level since 2022.
Keith Lanton:US Treasuries have long been the ultimate safe haven for global investors, but that status at the moment is being questioned and possibly eroded. While President Trump announced a reprieve on tariffs to most US trading partners on Wednesday, he did ratchet up the trade war with China, and some are suggesting that the damaged US relations with the rest of the world may become increasingly more challenging to mend, and one of the knock-on effects of this was that we saw a lot of weakness not only in treasury bonds, but as investors are seeking liquidity. We saw a lot of weakness in municipal bonds and Barron's with a column saying that municipal bonds went on sale last week Financial assets one of the few categories. When they are on sale, investors want to even buy less of them, as opposed to when Walmart's running a sale and we head to the store to buy more. So let's take a look at the sale taking place in the municipal bond market.
Keith Lanton:Top rated AAA munis with 30 year maturities briefly yielded the same as long-term treasuries on Wednesday A rare event because of the tax benefits that munis offer. That ratio is usually close to 85%. After a rally on Thursday and a sell-off on Friday, many high-grade 30-year bonds from issuers like New York City Municipal Water Authority and the Commonwealth of Massachusetts, we're yielding close to 5% versus 4.9% for the 30-year treasury. A 5% uni yield is equivalent to a 7.7% taxable yield for an investor in the 35% tax bracket, and that advantage is even better for residents of high-tax states like New York and California who hold in-state bonds. So if you're looking at that 5% yield on that New York City Municipal Water Authority bond and you're a resident of New York State and New York City and you're in the highest tax brackets, well you're looking at a tax-equivalent yield that you would need on a taxable bond to be north of 9% and that doesn't exist for a bond like New York City Municipal Water Authority which is rated AA1 over AAA in the taxable market. So to get the equivalent in the taxable market to the tax-free market for an investor with that situation that I just mentioned in those high brackets in New York, you would need to earn almost 9.5% taxable to get the equivalent of 5% tax-free. Those are levels we haven't seen in a long time. In fact, the municipal market index hit its highest level in 15 years last week.
Keith Lanton:Dave Hammer, who heads the muni portfolio at PIMCO, said there has been a big adjustment in muni yields this year and the market is attractively priced. Now there are reasons for the market being attractively priced other than the fact that the treasury yields have moved higher. One new fear for investors is the federal government will do away with the muni exemption after an informal Trump advisor broached that topic. Now Dave Hammer, who has the muni portfolio at PIMCO, said that he you know his opinion doubts that will happen, given broad bipartisan support for the tax break, which helps states and local governments borrow money more closely.
Keith Lanton:Dan Close, head trader of municipal bonds at Nuveen, cites several factors that have contributed to the current volatility. The muni sector had a weak first quarter Issuance picked up. Brad talked about all these new issues coming to market. Market conditions worsened in April due to seasonal outflows as people seek to pay their taxes another thing that Brad did mention to us a couple of weeks ago and this came at the same time as dislocations in the treasury market, which resulted in some investors selling some ETFs that own municipal bonds and in some investors selling some ETFs that own municipal bonds. At the same time, we've got those concerns about the continued taxation benefits of municipals and we had more sellers than buyers and a significant drop in those municipal yields, which is creating the opportunity today for municipal bonds. I suggest taking a close look at the muni market, depending on your tax bracket and seeing if municipal bonds make sense after the significant sell-off.
Keith Lanton:That's everything I've got.
Alan Eppers:Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, spotify and Pandora. For more information, please visit our website at www. heraldlantern. com.
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