The outlook for municipal bonds could be seeing a sustained improvement, making the case for getting muni exposure that extends beyond their tangible benefits such as stable credit quality and tax benefits.
As inflation fears start to temper and recession fears kick into a higher gear, getting muni exposure becomes a must not only for diversification purposes, but for their low risk of default. In the current market environment, yields are starting to fall back down to earth, making muni prices more attractive as of late.
“In late June, early July, yields on some municipal bonds were higher than in the Treasury market, meaning munis looked like a good bet regardless of their tax-exempt nature,” a Barron’s article said.
“Municipal bond yields have since fallen more than comparable Treasuries, but once their tax-exempt nature is considered, particularly for investors subject to the the highest federal income tax bracket of 37%, ‘munis still look extremely attractive,’ for taxable accounts, Mondillo says,” the article added.
Speaking more to the credit quality and stability of munis, it’s a necessary option should a recession hit due to increasing interest rates. Further Fed tightening has market and economic experts wondering whether it’s to the detriment of the economy’s growth.
“Another benefit today is municipalities can do well during an economic slowdown or potential recession,” the Barron’s article said further. “One reason is fewer cities and towns are downgraded in credit quality during a slowdown than other fixed-income asset classes, mainly corporate bonds. Corporations can experience credit rating downgrades as revenues shrink and profit margins are squeezed.”
Rather than hold various municipal bond positions, consider the Vanguard Tax-Exempt Bond ETF (VTEB ). With a 0.05% expense ratio, the fund offers low-cost exposure to municipal debt.
VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).
For more news, information, and strategy, visit the Fixed Income Channel.
