Episode summary
Why municipal bonds can win on an after-tax basis
Capital Ideas Podcast
· · 26 min · Hosts: Debbie Leow · Guests: Karl Zeile
Summary
Municipal bonds can play a central role in a diversified portfolio because they combine income, capital preservation and equity diversification with a tax advantage that matters most to higher-bracket investors. Karl Zeile said munis finance everyday infrastructure and institutions, from the MTA and LAX to hospitals, universities, charter schools, senior living facilities, roads and bridges. He also emphasized how broad the market is: more than 60,000 issuers across a roughly $4 trillion market, with credit quality ranging from AAA to below investment grade.
Karl argued that muni investors need to do deep bottom-up work, but not fall in love with any one credit story. Bond spreads, call features, coupons and maturities all change the risk-reward over time, so portfolio managers must keep re-evaluating relative value. He said the market’s 2025 underperformance versus taxable bonds, driven by heavy supply and softer demand, created about 300 basis points of lag, which he expects can normalize over the next one to two years and support munis.
He also made the case that The Capital System works in fixed income, not just equities, because traders, analysts and portfolio managers each contribute essential information on valuation, liquidity and credit. His personal edge, he said, comes from curiosity and collaboration, while his investment discipline is reinforced by a long-term mindset, which he likened to navigating by the horizon rather than short-term noise.
Key takeaways
- Karl Zeile says municipal bonds can offer an after-tax advantage because their interest is exempt from federal tax and often state tax, especially for higher-bracket investors.
- Zeile said the muni market has over 60,000 issuers and about $4 trillion in size, creating both breadth and complexity for investors.
- He said 2025 muni underperformance versus taxable bonds was about 300 basis points, driven by supply-demand imbalance, and expects a catch-up over one to two years.
- Zeile argued that fixed-income investors should not fall in love with a credit story because spreads, calls, coupons and maturities can all change the opportunity set.
- He said The Capital System works in bonds because traders, analysts and portfolio managers together improve decisions on valuation, liquidity and credit.
Notable quotes
“municipal bonds, the interest on municipal bonds, are exempt from federal income tax. And in many states, it's exempt from state income tax”
“there is so much here in the U.S. that we confront in our day-to-day life that was financed by municipal bonds”
“It's better to hold on loosely”
“you will see kind of a recalibration of the relative value of the two markets. That should be a nice tailwind for muni bonds”
How the episode opens
- Hi, I'm Mike Gitlin. Welcome to another episode of our "Capital Ideas" podcast. We get to meet the people behind the portfolios, hear from portfolio managers and analysts, some of the lessons learned, investment edge, ideas, a little bit more about Capital Group as well.
Today, we have Karl Zeile with us. Karl's a fixed income portfolio manager. He's based in LA.
And we're going to talk about the evolving world of fixed income, some of the strategies Karl is investing in, and the long-term thinking that drives us at Capital Group. Karl, welcome to the podcast. - Thanks for having me, Mike.
- So, Karl, you and I are both guilty of the same thing. We can be classified as crazy sports parents because one of the first times I met you, it was 11 years ago and we were running around the cross-country course. I have a picture of a cross-country race in Fresno, and I think this was the Clovis Invitational.
- Yeah, it was. - But your daughter was running, my daughter was running, and you and I were running. So, how do you remember that?
- Okay, so yeah, this was Clovis, an invitational. So, there are several hundred runners at an event like this. And for those of you who have not participated in spectating at a cross-country meet, you are in for a treat because it is absolutely an active participation.
- You need your running shoes on. - And I just, I'll never forget seeing you. It's a Saturday morning early, and you're there in your shorts, I'm in my shorts.
We both have our running shoes on, and we were ready to go. Like I knew immediately- - They were wondering if we were running the race. - I knew immediately that we were going to have fun working together because we were so completely aligned in the strategy of what we needed to accomplish that day as spectators.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- municipal bond after-tax returns
- fixed income portfolio management
- tax advantage of munis
- using munis in balanced portfolios
- muni bond outlook
Watch the episode
Watch “Why municipal bonds can win on an after-tax basis” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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