In the final of our five-chart series, Feeling Taxed?, we’ll scale a particularly slippery slope. Of course, that’s oil and this question:

Are you worried your portfolio will be affected by the recent slide in oil and energy prices?
I will once again point you to municipal bonds — one asset class that has been largely insulated from the drop in oil. While some states are major oil producers, the impact of oil’s slide has been fairly limited. Texas, the biggest oil producer, is also a big storer of oil — an advantage now given extremely elevated supplies. Many of the other energy-producing states are not large issuers of municipal debt.

And consider this angle: Low oil and gas prices mean more money in consumers’ pockets. To the extent that results in more spending, state coffers would benefit from the increased tax collections (and what’s good for state budgets is generally good for states’ creditworthiness and municipal debt ratings).

At a more granular level, consider that savings at the pump have traditionally resulted in increased tobacco consumption (the logic being that the excess cash is used to fund tobacco habits). We’ve seen evidence of this recently in the performance of corporate vs. municipal high yield. Whereas the energy sector wreaked havoc on corporate high yield last year, tobacco was the best-performing segment of the municipal high yield market. For investors, the key takeaway is that not all high yield is created equal.

Oil bust supports tobacco boon

chart-energy-vs-tobacco

For more of the potential advantages of municipal bonds, check out Feeling Taxed? What You Need to Know About Munis, When Volatility Taxes Your Patience … and Your Portfolio, Where to Find Decent Income, Without Indecent Risk, and When Home Is Where You Want Your Money to Be.

Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog.

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Investment involves risk. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 12, 2016, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader.

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