Tobacco bonds: An unfiltered look at a unique municipal asset class

We discuss the benefits of holding tobacco bonds in a diversified portfolio and provide an overview of the sector

Feb 2, 2018 | Steve Hong, Allen Davis and Stephanie Larosiliere

Municipal tobacco bonds were issued shortly after 52 US states and territories entered into a Master Settlement Agreement with tobacco manufacturing companies in November 1998. This is a predominantly high yield US municipal asset class. In 2017, high yield tobacco bonds returned 22%, outpacing all other revenue sectors of the US municipal market. Some important drivers of this strong performance included robust high yield municipal fund flows and demand for yield.

While the current total return potential may be limited on the back of this strong performance, we believe there are several other good reasons to consider holding tobacco bonds in a diversified portfolio. Important benefits include:

• Potential return enhancement
• Liquidity
• Inflation adjustment
• Payments extend into perpetuity

In this report, we discuss these benefits and provide an overview of the sector.

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