Risk-averse fixed income investors may be paying renewed attention to municipal bonds amid expectations that the Fed’s monetary easing campaign is just getting started. But experienced bond investors know there’s more to the story with munis. That includes assessing the fiscal health of issuing cities and states. In what could be good news for ETFs like the ALPS Intermediate Municipal Bond ETF (MNBD), states — broadly speaking — are on solid financial footing.
That’s true of some of the larger issuers of municipal bonds. While the outlook isn’t perfect across the board, investors considering MNBD can take heart in knowing that states’ budget reserves are sturdy.
“States are heading into the next fiscal year with reserve levels that are twice as strong as their historical average; revenue growth that has continued to beat forecasts; and the slowest rate of budgeted spending growth in more than a decade,” noted Lord Abbett & Co.
Why MNBD Matters
Not all states are acing budget scorecards. Some face significant deficits. Moody’s recently said that roughly 20 states are close to entering recessions. That indicates revenue growth could be pinched over the near- to medium-term.
Should those ominous scenarios come to pass, MNBD could be an advantageous way for advisors and investors to gain municipal bond exposure. The actively managed fund can alter its portfolio toward the sturdiest cities and states while potentially avoiding allocations to the most fiscally imperiled jurisdictions. Fortunately, data indicates that MNBD investors don’t need to lose sleep over the state of the states.
“The $327 billion in reserves held across all states at the end of fiscal 2025 represented 25.2% of state spending in that [year. That] proportion that has softened when compared to the stimulus-fueled highs of the pandemic [period. But] that remains materially above the long-term average of 9.6% seen since 1979,” added Lord Abbett. “State revenues collectively beat budgets by 2.2% in 2025, the fifth consecutive year of revenue [outperformance. Yet] 24 states are budgeting to spend less in 2026 than they had in 2025.”
Fortifying the case for municipal bond ETFs, are that revenue trends in some of the largest states. For example, 2025 collected revenue in California was 2.4% ahead of expectations. The $54 billion collected in Illinois was $700 million ahead of budget expectations, according to Lord Abbett. Massachusetts ran a surplus in the most recent fiscal year as did New York City.
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