Using the ICE AMT-Free US National Municipal Index as the measuring stick, it’s fair to say municipal bonds haven’t done much of anything from a performance perspective this year. That’s despite the fact that aggregate bond indexes have traded higher.
That doesn’t mean prudent income investors should abandon munis and ETFs like the ALPS Intermediate Municipal Bond ETF (MNBD). While municipal debt has been lethargic this year from a performance perspective, some market observers believe the time is right to revisit this corner of the bond market. That potentially signals opportunity with the actively managed MNBD.
In fact, MNBD’s status as an actively managed ETF could be a source of allure for market participants at a time when embracing fundamentally strong munis and higher yields on the steeper end of the yield curve could be winning strategies. MNBD can more swiftly respond to those opportunities than a constrained index-based fund.
MNBD Could Be Municipal Bond ETF Star
An array of tailwinds could boost MNBD into year-end. One tailwind is the possibility of multiple interest rate cuts by the Federal Reserve. Another is hope of an uptick in demand for municipal debt.
“We expect increased demand across municipal bond investment vehicles as investors seek to put new money and maturities back to work. Additionally, cheaper valuations across the asset class should entice investors to step back into the market as the Fed prepares to resume easing,” noted Goldman Sachs Asset Management (GSAM).
One of the headwinds confounding munis and ETFs like MNBD this year has been a significant spate of new issuance. That was not consistently met with strong demand. However, the demand picture may be improving. And it’s clear municipal bonds offer attractive fundamentals.
“Municipal credits have mostly proven resilient on a fundamental basis despite recent spread widening,” added GSAM. “Over the past few years, rainy day fund balances have reached historically high levels, providing a strong financial foundation. Additionally, municipal credit has been on a solid footing across many different sectors in the market.”
Broadly speaking, the stars could be aligning for munis to firm up over the near term. And with starting yields high on longer-dated municipal debt, advisors and investors have compelling reasons to revisit this corner of the bond market, perhaps with ETFs such as MNBD.
“Many foundational elements of the municipal bond market are in place for those considering them. Investors now can capitalize on the asset class’s compelling yields, robust credit fundamentals, and favorable technical shifts,” concluded GSAM. “We anticipate an improving technical environment in the second half of the year – particularly if some of the heavy 1H25 supply was a result of pulling forward of supply due to policy concerns in D.C. – which could set the table for attractive returns in longer maturities.”
For more news, information, and analysis, visit the ETF Building Blocks Content Hub.
