The capital markets are expecting a volatile October month ahead, which could see more investors flee to the bond markets. However, falling yields have presented a challenge for fixed income seekers, which could have more movement into other areas like municipal bonds.
If investors haven’t already been allocating a portion of their fixed income portfolio to municipal bonds, now is the time to get that necessary exposure via exchange-traded funds (ETFs). A Visual Capitalist investment case cited the following reasons for municipal bonds:
- Historical yield paired with strong returns
- High-quality credit ratings
- Inefficient pricing, which could create value opportunities
- Low correlations to other assets
- Longer durations
Fixed income has seen a number of record flows this year into exchange-traded funds (ETFs) as investors look to gain core bond exposure as a more dovish central bank looks to cut interest rates this year.
“Municipal bonds are rated with the same scale used to assess the risk of corporate debt issues,” John Kinsellagh wrote in Real Daily. “Those local or state governments with poor fiscal health will have lower ratings and, in most cases, higher yields.”
“One benefit of municipal bonds that makes them attractive, is that the debt is backed by the full faith and credit of the issuing municipality,” Kinsellagh wrote. “The local government or authority that sells its debt to investors has the taxing power available, should additional revenue be needed to pay the semi-annul interest due on the bonds. Bonds issued by private corporations don’t have this tax-levying power available.”
Even with the threat of negative yields and inverted yield curves, most analysts will agree that it’s still necessary for investors to have core bond exposure in their portfolios. However, advisors can also suggest capital allocations to other areas of the bond markets where more substantial returns can be realized like the municipal bond markets.
For investors who don’t know where to begin, they can start with the most active movers thus far in 2019:
For more market trends, visit ETF Trends.