Yield-Starved Investors Can Look to Opportunities in Municipal Bonds

Aside from the 30-year note, benchmark Treasury debt been giving investors less than a 2% yield as a result of a deluge of investors piling into safe haven assets as of late. However, one area of the bond market where they can look is high yield municipal bonds.

Local government debt can offer investors distinct advantages over other bond markets like corporate debt.

“So, as you know, some of the tax law changes have made it even harder for people to take advantage of deductions and so forth,” said Morningstar’s senior analyst Eric Jacobson. “And so, people are just in search of a way to gain income without having it be taxed or disallowed, what have you. So, that always is something that will make municipal bonds that have tax advantages more appealing to people.”

“Depending on how you look at the geography, a lot of the high-tax states are really in such a way that investors in those states really can use and have demand for municipals even more than they already did,” Jacobson added. “Because as you know, if you have states where they don’t tax the interest from their own bonds, it’s a big deal. And if you live in New York City, for example, things like that, where you can get triple-tax-exempt.”

Before diving into high-yield munis, however, investors need to understand what they’re getting into.

“So, for example, in taxable high-yield, you can look at that universe and you can see a pretty clear circle around the companies and the kinds of bonds that you will find in that universe,” said Jacobson. “They are generally below investment-grade, they have ratings that are either BB or lower, and most of the names in that space have ratings, okay? And the usual suspects in terms of industries, often a lot of capital-intensive things, but often things that have a lot of buyout activity and generating a lot of income. But whatever the universe is, and it is kind of broad, it’s a known, pretty specific universe. It’s not huge in terms of the breadth.”

One high yield municipal bond ETF that’s worth a look is the SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB). HYMB seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays Municipal Yield Index.

The fund invests a majority of its total assets in the securities comprising the index and in securities that the Sub-Adviser determines have economic characteristics that are substantially identical to the economic characteristics of the securities that comprise the index. The index measures the performance of USD-denominated high-yield municipal bonds issued by U.S. states, the District of Columbia, U.S. territories and local governments or agencies.

For more relative market trends, visit ETF Trends.