Can the Municipal Bond Market Weather the Coronavirus Storm?

The U.S. Federal Reserve is stepping in to toss a life preserve to the bond markets, including corporate debt and high yield, but few may have seen municipal bonds seeking help. Local government debt is perceived as some of the safest debt, but the coronavirus pandemic is raining on that safe haven parade.

“With local economies grinding to a virtual halt, businesses closed and more than 22 million Americans thrown out of work, the fallout is rippling through the $3.9 trillion markets that finances far more than just governments that virtually never default on their debts,” a Bloomberg report said. “Hospitals, airports, stadiums and speculative ventures like the Virgin Trains USA railroad in Florida have also sold debt through government agencies — and it’s backed by the money generated by their businesses.”

The report went on to state that a wave of defaults could follow, but whether it’s low tide or tsunami depends on how quickly local governments can recover in a post-coronavirus environment.

“Analysts widely expect to see more defaults in the state and local debt market, adding to the nearly $1 trillion of fixed-income securities that by last month had already tipped into distress nationwide, though the scale will depend heavily on how quickly the economy recovers,” the report said further. “Speculation about such strains contributed to a record-setting pullback from municipal-bond funds last month, sending prices tumbling by the most in at least four decades until they rebounded on optimism about the $2.2 trillion economic stimulus enacted in Washington.”

Investors looking to get exposure to munis without purchasing the actual debt can do so via exchange-traded funds (ETFs) like the Xtrackers Municipal Infrastructure Revenue Bond ETF (RVNU). RVNU seeks investment results that correspond generally to the performance of the Solactive Municipal Infrastructure Revenue Bond Index that’s comprised of tax-exempt municipal securities issued by states, cities, counties, districts, their respective agencies, and other tax-exempt issuers.

Here are a couple more muni bond ETFs to consider:

  1. VanEck Vectors AMT-Free Long Municipal Index ETF (BATS: MLN): seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays AMT-Free Long Continuous Municipal Index. The index is comprised of publicly traded municipal bonds that cover the U.S. dollar-denominated long-term tax-exempt bond market.
  2. Franklin Liberty Municipal Bond ETF (NYSEArca: FLMB):  seeks a high level of current income that is exempt from federal income taxes. Although the fund tries to invest all of its assets in tax-free securities, it is possible that up to 20% of the fund’s net assets may be in securities that pay interest that may be subject to the federal alternative minimum tax and, although not anticipated, in securities that pay interest subject to other federal or state income taxes.

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