Municipal bonds were one of the highlights of the bond market during the height of the pandemic with their attractive yields and tax benefits. Enter 2022, and they’ve followed the rest of the debt market downward, but that could be changing.
Rate hikes have been applying downward pressure on bonds, but the sell-offs could be slowly dissipating. As such, this is bringing in bond investors who are keen on hunting for bargains, including those that could be found in the vast municipal debt market.
“Municipal-bond exchange-traded funds took in a record $1.8 billion for the week ended May 25, quadruple their weekly average for 2022, according to data from Refinitiv Lipper,” a Wall Street Journal report said. “Municipal-bond mutual funds continued to lose investor cash, but outflows fell to their lowest level since March.”
Through May 24, municipal bonds have returned 7.59%, following the rest of the downtrodden bond market, which has been correlating with stocks as of late. Municipal bond investors can take some comfort in knowing that it’s less than the 8.47% loss that the Bloomberg U.S. Aggregate Bond index is experiencing.
“I think things are turning around. I don’t think it’s a blip,” Municipal Market Analytics partner Matt Fabian said of the rally. “I think munis had gotten too cheap.”
An Active Approach to Munis
Rather than do all the bargain hunting themselves, investors can also opt for an active management strategy that utilizes the skills of a portfolio manager wrapped into a dynamic investment vehicle: an exchange traded fund (ETF). To narrow it down even further, investors can consider the American Century Diversified Municipal Bond ETF (TAXF).
The fund seeks to provide consistent tax-free income by employing an active, research-driven process that draws from across the municipal bond universe and adjusts exposure depending on prevailing market conditions. As with local government bonds in the U.S., credit risk is minimized with close to 80% of the fund ranging in debt rated at AAA to A (as of May 31).
The fund features a 30-day SEC unsubsidized yield of 2.83% as of May 31. To cost-conscious investors wondering whether the active management component will prove to be too expensive, TAXF’s expense ratio comes in at just 0.29%.
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