Despite some high-profile scares in the municipal debt market, muni bonds and related exchange traded funds are still a relatively safe asset class, provide attractive tax-equivalent yields and offer increased diversification.
On a recent webcast, What’s Next for Municipals?, Blair Ridley, Director and Portfolio Manager for Deutsche Asset & Wealth Management, points out that the majority of municipalities are on a strong footing.
“Municipal revenues continue to increase and defaults continue to decline,” Ridley said.
State collections have increased for 16 consecutive quarters after declining five straight quarters during the recession. Municipalities have also kept their debt-to-GDP relatively stable over the past five decades. State and local debt-to-GDP have remain below 20%, whereas federal debt ratios have increased to over 100%.
Moreover, credit agencies have recently upgraded some states’ credit ratings due to their decreasing budget deficits, including California and New York. [California Muni Bond ETFs Look Golden]
The muni market is also being supported by a record low supply of new issuance. Some analysts expect new issuance of $300 billion or less in 2014. [Muni ETFs Supported by Lowest New Issuance Since 2001]
The recent swings in the munis market are attributed to the high-profile bankruptcy filings in Detroit, Michigan and Stockton, California, along with financial problems in Puerto Rico. Specifically, general-obligation bonds, which are backed by credit an the taxing ability of the issuing municipality, are under increased scrutiny as some cities fail to generate enough tax revenue to cover their debt.
Alternatively, investors can consider the db X-Trackers Municipal Infrastructure Revenue Bond Fund (NYSEArca: RVNU), the first ETF to focus exclusively on revenue bonds.