While fixed income markets have been rocky this year, municipal bonds still show strong fundamentals and could present an attractive opportunity for investors in the top tax bracket. Not only have yields on municipal bonds remained high since the summer, but tax-equivalent yields on municipal bonds are nearing 7% for the first time in over a decade.
Munis, particularly high-quality munis, appear ready to withstand a potential recession, due in part to a combination of low debt and ample cash.
“While recession forecasts entail risks for many markets, municipal balance sheets are flush with reserves following pandemic-era stimulus, and they should remain healthy even if an economic downturn unfolds next year,” according to Vanguard Group.
Paul Malloy, a principal at Vanguard and head of U.S. municipals and credit research, recently said: “Municipal bonds offer some of the best value we’ve seen in a while, particularly for longer-dated issues.”
Malloy added that “valuations are close to those of U.S. Treasuries, which means today’s investors are getting tax-exempt income at the same level as taxable income. That’s also true for some corporate issues. State and local governments are in their best financial shape in a decade. A lot of high-quality issues are available right now at relatively cheap valuations.”
Plus, munis are rated AA–, suggesting a higher degree of protection against default risks than lower-rated sectors such as investment-grade credit.
Investors in higher tax brackets wanting easy access to muni bonds may want to look into the Vanguard Tax-Exempt Bond ETF (VTEB). 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).
The fund has a 30-day SEC yield of 3.39% as of December 12 and carries an expense ratio of just 5 basis points.
For more news, information, and analysis, visit the Fixed Income Channel.