Inflation fears are once again reinvigorating talks of a potential recession as the Fed tries to wrangle inflation under control. For fixed income investors, municipal bonds are a prime option should economic growth stagnate.
Municipal bonds offer a plethora of benefits, including tax-free income. However, local governments are also a stable option should an economic downturn arise from too much tightening of monetary policy by the Fed.
“Over the years, I have advised many people on municipal bonds, even outside of a recession,” wrote in CEO World Magazine. “They’re simply one of the best options for stable growth and rarely experience the problems other investments face during a recession. Understanding why this is the case is important because it may help you ride out the recession without experiencing any financial issues.”
Furthermore, their resilience has stood the test of time. Compared to potentially higher-yielding corporate bonds, munis offer investors more peace of mind, especially in the current market environment where inflation and rising rates are top-of-mind concerns.
“For instance, municipal bonds come with significantly lower default rates compared to other bonds,” Appelbaum added. “Their five-year all-rated default rate from 1970 to 2020 is just 0.08%. That’s much lower than the default rate of corporate bonds, which default at 6.89%. Why is that a significant benefit? It indicates that your investment is safe and isn’t likely to disappear on you out of nowhere.”
Muni Exposure in an Active ETF
Investors who haven’t added munis to their portfolios have a wide array of options to choose from. An easy way to gain access is via the actively managed Invesco Municipal Strategic Income ETF (IMSI).
Active management allows the investor to essentially put the selection of muni debt holdings in the hands of professional portfolio managers as opposed to selecting muni bonds themselves. Additionally, active management allows for adjustments to the holdings when market conditions warrant a change, allowing for dynamic exposure versus a passive fund.
The fund seeks current income with the tax benefits of municipal securities that are exempt from federal income taxes and invest in other instruments that have similar economic characteristics. In order to extract more yield (a 30-day SEC yield of 3.37% as of February 21), the average duration of debt holdings is around six to seven years.
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