According to the latest report from State Street Global Advisors, fixed-income exchange-traded funds (ETFs) took in $16.2 billion during a tumultuous December that saw the Dow Jones Industrial Average fall 8.7 percent and the S&P 500 lose 9 percent, making it the worst December since 1931.
The move into bonds certainly signaled a risk-off sentiment, but there are certain pockets of the bond market that are getting more attention than others. One specific corner of the debt space investors should consider is the municipal bond market, especially if the volatility that roiled U.S. equities continues through much of 2019.
“December was an unusually bad month for investors in riskier fixed-income paper, the sort that requires a graduate education and much bespoke data to understand,” wrote John Dizard of the Financial Times. “Cultured European high-yield bonds cowered before the gilets jaunes. US oil and gas explorers cut budgets and borrowing. Faang stocks (Facebook, Apple, Amazon, Netflix and Google) were withdrawn from China to Cupertino.
“Yet the Bloomberg Barclays Municipal Bond Index Total Return kept rising, for a year-to-date total return of about 80 basis points and a one-year return of 1.75 per cent. Not a lot but still positive,” Dizard noted.
U.S. municipal bonds represent a $3.8 trillion slice of an even bigger bond market pie. One way for investors to get exposure to municipal bonds and thus, get slice of the muni bond pie, is via ETFs that focus on these debt issues.
In short, municipal bond ETFs focus on the debt of municipalities, such as cities or towns.
ETF offerings in the muni bond market include the iShares National Municipal Bond ETF (NYSEArca: MUB), SPDR Nuveen Bloomberg Barclays ST Municipal Bond ETF (NYSEArca: SHM) and the Vanguard Tax-Exempt Bond ETF (NYSEArca: VTEB).
Foreign Investment Interest
While the majority of fund flows into fixed-income ETFs went into aggregate bond funds and government debt, foreign investment into municipal bonds saw an uptick, Dizard noted. It’s a play that U.S. investors should also take note off as more money flows out of riskier bond funds like high yield, which saw over $2.4 billion in outflows during the month of December.
“In recent years, though, the draining away of fixed-income yield around the world has made US munis attractive to foreigners, who are now among the major suppliers of new money to the market,” Dizard wrote. “As one opportunistic American muni investor points out: ‘The average 30-year muni bond now pays 105 per cent of the yield of the 30-year US Treasury. And unlike Treasuries, most of those munis can be called after 10 years. It is one of the best fixed-income opportunities in the world.'”
For more trends in fixed income, visit the Rising Rates Channel.