The Federal Reserve recently lowered interest rates for the second time this year. So fixed income investors may be examining longer duration bonds or lower quality debt to try to access higher yields. Those are certainly predictable responses to Fed easing. But the latest rate cut doesn’t imply bond market prudence should be totally eschewed. In fact, there are still compelling reasons to consider muni bonds and ETFs, such as the ALPS Intermediate Municipal Bond ETF (MNBD). What munis and MNBD lack in glamour, they make up for with opportunity and relative security.
One part of the muni bond opportunity equation is yield. Broadly speaking, municipal bond yields, though not excessively elevated, are high enough to make a difference for some investors. That could be a selling point with MNBD.
“Consider that for an investor in the top tax bracket, for example, a muni yield of 3.5% is the equivalent of a roughly 6% yield on a fully taxable bond like a corporate or Treasury bond. The tax-equivalent yield is lower for investors who are not in the top tax bracket,” according to Charles Schwab research. “After adjusting for a muni’s tax advantage, even an investor who’s not in the top federal tax bracket can obtain yields higher than many other fixed income investments.”
MNBD Has Other Favorable Factors
Municipal bond, including those held by MNBD, are also ideal for credit-conscious investors. That’s because the broader universe is loaded with high-quality fare. As Schwab notes, roughly 70% of municipal bonds are rated AAA or AA — the two highest credit grades. Plus, that conservative posture is accompanied by the possibility of some near-term upside.
“Total returns struggled to start the year, partly due to an imbalance between supply and demand. Volatility in the broader Treasury market in April due to tariff announcements also weighed on munis. Going forward, we expect a more favorable supply-and-demand picture to develop, which should be supportive of total returns,” added Schwab.
Another reason MNBD could be attractive to a broad swath of investors — particularly those with large positions in equities and/or Treasuries — is because municipal bonds have legitimate diversification properties.
“Combining municipal bonds with a more volatile investment like equities reduces the upside of the portfolio but can also diminish the downside. We believe that investors with a lower tolerance for portfolio volatility may want to consider an allocation to municipal bonds if it fits their risk tolerance,” concluded Schwab.
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