Investors Appear to Be Diving Back Into Municipal Bonds Again

Municipal bonds were one of the prime choices during the height of the pandemic as fixed income investors sought the safety of government bonds that offered competitive yields as well as tax advantages. 2022 hasn’t been as kind to munis and the bond market in general, but investors could be diving back into munis again.

“While investors piled a record-breaking $96.8 billion of net money into U.S. muni mutual and exchange-traded funds in 2021, weekly inflows have been negative for most of 2022, according to Refinitiv Lipper data,” CNBC reported.

Nonetheless, there are signs that outflows are slowing. That opens up opportunities for bargain hunters looking at the depressed bond market and eyeing municipal bonds in particular.

“I’m not necessarily saying we’re going to see a complete turnaround in the next week or two,” said Tom Kozlik, head of municipal research and analytics at HilltopSecurities, in a CNBC report. “But we are going to see bits of strengthened demand through the summer.”

Kozlik also noted that a number of munis will mature this summer, allowing for investors to reallocate capital back into these assets and thus push inflows higher into muni-focused funds. High credit ratings will also make munis an attractive option for bond investors.

“I think that public finance upgrades will outpace downgrades in 2022,” said Kozlik.

Muni Exposure in 1 ETF

As opposed to looking for individual opportunities in the vast muni bond market, investors can opt for an easier solution in the Vanguard Tax-Exempt Bond ETF (VTEB). The fund features a low expense ratio of 0.05% along with a 30-day SEC yield of just under 3% as of May 31.

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).

Average duration of the debt holdings is 5.2 years (as of May 31). Credit risk is minimized with ratings in the majority range of AAA to A.

For more news, information, and strategy, visit the Fixed Income Channel.