Market volatility continues to rain heavy in the equities market. That's opening additional opportunities for investors looking to add bonds to counterbalance the market fluctuations. With that, muni bonds remain an attractive option for an ideal blend of yield and stability.
While Treasury notes remain a safe haven, munis are also exhibiting strong fundamentals. This is even despite a recent sell-off, which isn't indicative of the quality of these debt issues.
"First and foremost, the credit quality of the municipal bond market remains strong and is likely not the reason for the sell-off," asset manager Lord Abbett noted. "Most often, volatility in the municipal market is not due to inherent issues involving issuers’ financial standing but rather outside factors; this was again the case in the early April sell-off."
And, of course, in times of still relatively high interest rates, a prime attraction of munis is yield. Fixed income investors looking to reach for more yield beyond what Treasury notes can offer may want to give munis a closer look. This is especially the case in the current economic environment.
"These higher yields—at levels not seen for most of the past decade—should represent an attractive entry point for investors, and a significantly steep muni yield curve generously compensates investors for extending duration/interest rate risk, which is not the case in all bond markets," Lord Abbett added.
As far as the volatility from the tariff tantrum is concerned, muni bonds should remain stable, in their opinion.
"While the recent tariff news has significantly affected markets, it's important to remember that municipal fundamentals remain solid, in our view," they added. "The municipal bond market has historically shown resilience through tougher economies."
2 Muni Options From Vanguard
Given the optimistic view, there are easier options to get muni exposure as opposed to individual debt issues. Vanguard, for example, has a pair of options one might consider.
First up is the Vanguard Tax-Exempt Bond ETF (VTEB). The fund tracks the Standard & Poor’s National AMT-Free Municipal Bond Index. This index measures the performance of the investment-grade segment of the U.S. muni bond market, giving investors only the highest-quality issues.
The fund is heavily diversified, with the index including debt issues from state or local governments or agencies whose interests are exempt from U.S. federal income taxes, and the federal alternative minimum tax. Furthermore, for cost-conscious investors, VTEB also features a low 0.03% expense ratio.
For those looking to shorten duration on muni exposure, take a look at the Vanguard Short-Term Tax-Exempt Bond ETF (VTES). The fund tracks the S&P 0-7 Year National AMT-Free Municipal Bond Index. That index aims to balance tax efficiency with tax-exempt yield. For an appropriate level of duration risk, this balance can translate to potentially higher yields than those afforded by competing strategies. Like VTEB, exposure comes with a low 0.06% expense ratio.
For more news, information, and analysis, visit the Fixed Income Channel.
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