As people digest the changing Federal Reserve outlook, fixed-income investors may want to hold onto their municipal debt and bond-related exchange traded fund positions.
“One area of the U.S. bond market that does merit attention is the municipal market,” according to Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock. “To be sure, there is a prospect for some headline risk, as we saw last week when Puerto Rico announced it will default on $37 million of bond payments that were due Jan. 1. However, that has long been expected, and we believe the broader tax-exempt market remains on solid footing. The bottom line: We continue to favor municipal bonds within a fixed income portfolio.”
Municipal bonds have been outpacing U.S. Treasuries. Over the past year, the intermediate-term iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) rose 2.9%, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) gained 3.1% and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) increased 3.7%. Meanwhile, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which tracks intermediate-term Treasuries, was up 1.4% over the past year.
Furthermore, within the muni space, high-yield debt has outperformed. Over the past year, the Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD) gained 5.2% and SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB) advanced 3.7%.
The divergence in global central bank policy, lower inflation expectations and rather soft Federal Reserve rhetoric have calmed fears of a sudden spike in interest rates.