As the rate-hiking cycle appears to be over, the high yields that fixed income investors have been experiencing could also be ending. That said, assets like municipal bonds can offer investors benefits that extend beyond yield.
According to a recent Barron’s article, investment strategists in particular “like the safety of the asset class and are finding different ways to squeeze a bit more juice from the lemon.” They also lauded munis for the tax benefits that they offer, noting they “look even better for individuals in a top bracket in a high-tax state, where that 3.5% is the equivalent of a 6% taxable yield.”
Additionally, the macroeconomic environment is conducive to munis as the Fed tries to ensure that it hikes rates enough to keep pace with inflation and subsequently cut when economic growth starts to dissipate, but not to the point where it causes a recession. Additionally, rate cuts may have already been priced into stocks, making them potentially overvalued relative to other assets like municipal bonds. A confluence of those factors makes the muni yield even that more attractive.
“Throw in some worries about overvalued stocks and the economy softening, and that secure 6% starts to look pretty attractive,” the Barron’s article added. “Analysts polled by FactSet were predicting a 6% gain for the S&P 500 index in 2024, and we’re already halfway there. If the economy weakens, interest rates would likely fall, creating gains for munis since bond prices move inversely to interest rates.”
One ETF For Municipal Bonds Exposure
Fixed income investors looking to get exposure to municipal bonds have a variety of options, but one exchange traded fund can capture it all: the well-diversified Vanguard Tax-Exempt Bond ETF (VTEB).
The fund 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. Overall, this index includes municipal bonds from issuers, primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes, and the federal alternative minimum tax.
Of course, a top-of-mind goal for fixed income investors, especially in a year in which rate cuts could happen at a quick pace, is extracting the most yield in the current macroeconomic environment. To that note, VTEB brings a yield of 3.26% (also as of January 25), with an average duration of 5.2 years and average stated maturity of 13.7 years.
For more news, information, and analysis, visit the Fixed Income Channel.