Broadly speaking, municipal bond yields are low, but the asset class remains an important of conservative income portfolios. Investors have an array of exchange traded funds to consider in this category, including the iShares National Muni Bond ETF (NYSEArca: MUB).

MUB, the largest municipal bond exchange traded fund, seeks to track the investment results of the S&P National AMT-Free Municipal Bond IndexTM. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of the investment-grade segment of the U.S. municipal bond market.

MUB YTD Performance

“Municipal bonds posted strong total returns and significantly outperformed Treasuries in November, with the broad S&P Municipal Bond Index gaining 1.27% for the month, bringing the year-to-date total return to 4.34%,” notes BlackRock research. “Longer term and lower credit quality assets were the stronger performers. Relative valuations tightened across the yield curve with municipal-to-Treasury ratios well below their 5-year averages in the intermediate and long end.”

Yields on munis have been steadily falling with bond prices rising, even before the coronavirus hubbub. After the 2017 tax law changes, demand for tax-exempt munis became more attractive in response to caps in the federal deduction for state and local taxes, especially among higher-tax states. The tax law also diminished supply due to new limits on when governments can issue tax-exempt debt.

Municipal Bonds and Covid-19

Municipal bonds have long been considered some of the most reliable fixed income options. Enter Covid-19 and a once untouchable space could now be in jeopardy with defaults. Nevertheless, MUB and friends are proving steady amid a spate of new issuance.

“The record-setting issuance driven by election uncertainty in October was counterbalanced by a dearth of supply in November. Taxable issuance remained proportionally elevated at 26% of total supply, making traditional tax-exempt issuance even more miniscule. As a result, new issues were oversubscribed by more than 10x on average (versus a year-to-date average of roughly 5x),” according to BlackRock.

Muni demand is holding up and investors aren’t pulling money from related funds.

“Strong demand continued through November albeit amid slightly more volatility than in recent months. After a modest outflow at the start of the month, mutual fund flows reverted to more consistent inflows, with considerable strength in long-term funds,” adds BlackRock.

For more on income strategies, visit our Retirement Income Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.