Municipal bonds have long been desirable assets for income-seeking retirement investors, but that desire is being tested this year due to low yields.

For example, the 30-day SEC yield on the iShares National Muni Bond ETF (NYSEArca: MUB), the largest municipal bond exchange traded fund, is just 0.78%. That’s well below what investors earn on 10-year Treasuries. Still, some market observers maintain that there’s a case for munis as long as investors exercise selectivity and prudence.

“Firm demand continued, and the asset class garnered $9 billion in mutual fund inflows in August. This brings year-to-date flows to $69 billion and keeps 2021 on pace to eclipse 2019 as the best fund flow year ever by November,” according to BlackRock research.

The $23.61 billion MUB tracks the ICE AMT-Free U.S. National Municipal Index and holds more than 4,900 bonds, providing investors with extensive exposure to the investment-grade municipal bond landscape. That depth is commendable today because the risk/reward profile isn’t uniform across the muni space.

“We maintain a defensive posture over the near term amid rich valuations, tight credit spreads, and less historically favorable supply/demand and interest rate dynamics in the fall,” adds BlackRock. “We acknowledge the potential for increased volatility stemming from elevated political, fiscal and monetary policy, and COVID-19-related uncertainties. However, we maintain a favorable view of the asset class over the medium term amid improved credit fundamentals and continued strong demand for tax shelter.”

BlackRock advises avoiding munis issued by speculative issuers with unproven technology and also those issued by assisted living facilities and long-term facilities in markets with ample competition. Conversely, the asset manager is bullish on high-quality states. New York and California combine for over 41% of MUB’s roster. Tax receipts are trending higher in those states and both are proving somewhat adept at restoring some of the jobs lost due to the coronavirus pandemic.

Investors considering munis should also monitor goings on in the nation’s capitol, including debate over various spending packages and efforts to potentially raise taxes, which could boost the allure of municipal bonds.

“Municipal market participants continue to watch Congressional negotiations on infrastructure and budget reconciliation bills,” notes BlackRock. “The Senate’s $1 trillion bipartisan infrastructure bill passed in August excluded certain municipal industry priorities such as tax-exempt advance refundings, a direct-pay bond program and broadening of the bank-qualified bond definition.”

With an effective duration of 5.97%, MUB is low risk from a credit perspective as about 91% of its holdings are rated AAA, AA or A.

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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.