Meanwhile, yields benchmark 10-year munis have dipped to 2.05%, their lowest since May 2013 after the interest rate declined for three straight quarters. Over the past 13 consecutive weeks, investors have piled into U.S. muni mutual funds, the longest stretch since 2012.
Looking ahead, interest rate risk will likely turn up volatility and push down on muni returns.
“We expect rates to gradually move higher and volatility to pick up as we get closer to a Fed exit,” Zezas added. “Those are things that are a risk in muni performance.”
Consequently, both Deane and Zezas also advice investors to shift out of high-yield municipal bonds and into higher-quality credit after the significant run-up muni debt this year. For instance, the Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD) has increased 13.6% year-to-date and 15.4% over the past year. HYD has a 4.63% 30-day SEC yield and a 7.66% taxable equivalent 30-day SEC yield for those in the highest income bracket. [High-Yield Muni ETF Navigates its way to New Highs]
“With the rally that we’ve had, it just makes us a little more conservative,” Deane said. “If we’re going to put money to work, it’s going to be higher-grade stuff and it’s going to be shorter.”
For more information on the munis market, visit our municipal bonds category.
Max Chen contributed to this article.