As the situation between Russia and Ukraine continues to play out, investors are heading into municipal bonds to help pad their portfolios amid the volatility. In the meantime, a sustained moved towards munis continues, according to a Bloomberg report.
Whether it was the long or short end of the yield curve, muni yields fell based on Bloomberg BVAL data. In the case of the benchmark 10-year yield, it experienced its largest drop since the November 2020 U.S. presidential election.
Meanwhile, equities investors have been experiencing bouts of seasickness the way stocks have been moving up and down. This is causing investors to seek safe havens such as municipal debt.
“The direct implication is going to be a similar flight to quality in munis,” said Nisha Patel, a managing director at Parametric Portfolio Associates LLC, who also noted that the muni rally could continue as they present investors with a value-oriented option given that their yields are inching closer to Treasury yields.
According to the Bloomberg report, this is “an unusually poor performance for a period that typically sees the market gain amid reinvestment demand and a relatively thin calendar of new bond sales.” However, equities investors haven’t fared much better with the S&P 500 down 8%.
Muni Exposure in an ETF Wrapper
Bond investors looking to add more quality with local or state debt can look to munis. The tax benefits of munis also make them an attractive option for fixed income investors looking to minimize the tax bite.
One way to get municipal bond exposure is via an exchange traded fund (ETF) wrapper. One such fund is the Vanguard Tax-Exempt Bond ETF (VTEB), which offers low-cost exposure to municipal debt at a 0.06% expense ratio.
VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).
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