Municipal bonds and the exchange traded funds (ETFs) that track them are in a healthy position, as demand is strong and is predicted to remain so for the upcoming year.

Although there is a large debt hanging over state and local economies, the demand for debt investments should stay in high demand, according to analysts. Individual investors are scooping these investments up and the acceptance rate of these are high. Money News reports that demand was evident in the first-quarter’s big finish, with the issuance of about $12 billion in debt in the final week of the quarter, including a massive California deal, making this the best advance since December 2006.

The second largest flow into this investment area was seen in mutual funds, which posted a net inflow of $13.9 billion last quarter. The rush proved rewarding for retail investors who bought into municipal bond mutual funds, said one Lipper analyst. The quarterly performance of muni bond funds of 4%- 7% returns shows that the performance is attractive.

The authorities have pumped more than $1 trillion into the economy and lowered interest rates to nearly zero, leaving the possibility of inflation looming further down the road, but it’s not an imminent factor. This is another reason many investors have flocked to this area of the market. Investors should keep an eye out for inflation in the future, however.

Municipal bond ETFs offer many benefits as they give investors a low-cost and safe way to invest in the municipal market. And since municipal bonds are more transparent than any other bond, you know exactly where your money is.

  • iShares S&P National Muni-Bond ETF (MUB): up 3.4% year-to-date; 3.6% yield

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.