Exchange traded fund manager BlackRock says municipal bonds are an attractive area of the fixed-income markets due to overblown default fears.

“In particular, we see opportunities in many areas of the municipal bond market,” says BlackRock, which oversees the iShares ETFs. “This may seem counterintuitive given the recent focus on the potential for municipal defaults, but our view has been that such concerns are overheated and that municipal bonds remain well positioned.” [Muni Bond ETFs]

Stock ETFs have been volatile and many bond classes are offering rock-bottom yields, giving conservative investors few obvious choices other than stuffing money under the mattress. Some investors remain worried about a potential spike in interest rates that would cause bond prices to decline.

“Given this backdrop of uncertainty, where can investors find value in the current environment? From a fixed income perspective, we would stress that this is not a time to be overly aggressive with interest rate risk. Given the economic uncertainty around the globe and the lingering questions over policy direction, it is not inconceivable that interest rates could fall further,” BlackRock strategists wrote in a recent note. [ETF Chart of the Day: U.S. Treasuries]

“It is also possible that we could see a steepening of the yield curve if economic data improves,” they said. “Yields have and will likely continue to trade in a highly volatile fashion, and predicting short-term yield changes in this environment is extremely difficult.” [Active High-Yield ETF]

BlackRock said some higher-risk sectors of the credit market such as high yield still need to see improvement on balance sheets. However, it does see some opportunities in investment-grade credit. [ETF Spotlight: iShares Investment Grade Corporate Bond]

“In the sort of muddle-through economic environment we have been forecasting, we suggest a focus on longer-maturity, higher-quality assets,” the analysts wrote.

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