In the fixed-income market, investors may find that municipal bonds and related exchange traded funds are a more attractive play than Treasuries or corporate debt.
“Overall, municipal bonds maintain their high-quality appeal and continue
to look attractive versus both Treasuries and corporate bonds,” according to BlackRock. “We’re seeing competitive yields on a before-tax basis—which only further illuminates the after-tax value.”
For instance, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has a 6.43 year effective duration, has a 2.19% 30-day SEC yield and a 3.87% tax equivalent 30-day SEC yield for those in the highest income bracket. In comparison, the iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI), which has a 4.53 year effective duration, has a 1.52% 30-day SEC yield and the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.81 year effective duration, has a 2.43% 30-day SEC yield.
Moreover, the BlackRock strategists point out a couple of factors that continue to support the munis market: high demand, relatively low supply, tax-season-inspired appreciation for the tax-exempt status and improving credit among states and local issuers.
Nevertheless, potential investors should still be aware that bond prices could fall as rates rise, even though investors saw benchmark 10-year Treasury yields drop about 25 basis points at the start of the year.
“This does not take away from munis’ appeal as an attractive source of tax-advantaged income, but it does suggest that a diversified and unconstrained approach is a smart call in the tax-exempt space as well,” the BlackRock strategists added.