Even Municipal Bonds Aren’t Safe From Downgrades

It seems like no asset is safe in this coronavirus-stricken market—even municipal bonds, which were once seen as some of the safest debt issues in the fixed income space. S&P Global Inc and Moody’s Corp, two of the largest credit rating agencies, issued downgrades that included municipal bonds.

“Municipal bonds tied to specific projects or taxes are also being downgraded. S&P recently cut the ratings on revenue bonds backed by a student housing project in Corpus Christi, Texas, by six notches, taking the debt from the lowest notch of investment-grade deep into junk territory,” a Wall Street Journal report noted. “Falling tax collections are also hitting bonds backed by governments’ broad taxing powers.”

And it’s not just downgrading that prospective municipal bond investors need to watch. It’s having a boomerang effect on insurers that guarantee these bonds.

“There are signs municipal bond investors may be bracing for losses,” the report added. “Assured Guaranty Ltd., which insures many municipal bonds, has seen its stock price fall by more than half since the start of March, outpacing the broader market decline. “Assured Guaranty is well-positioned to manage the impacts of the current situation,” the company’s head of investor relations said in a statement.”

Looking at the relative strength indicator (RSI) for the Bloomberg Barclays Municipal Bond index, munis are deep in oversold territory, which could signal a prime buying opportunity.


^BBMBTR data by YCharts

Either way, getting municipal bond exposure is still a solid risk-off move, and here are three municipal bond funds to consider:

  1. 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.
  2. Xtrackers Municipal Infrastructure Revenue Bond ETF (NYSEArca: RVNU): seeks investment results that correspond generally to the performance, before fees and expenses, of the Solactive Municipal Infrastructure Revenue Bond Index. The fund will invest at least 80% of its total assets (but typically far more) in instruments that comprise the underlying index. The underlying index is comprised of tax-exempt municipal securities issued by states, cities, counties, districts, their respective agencies, and other tax-exempt issuers.
  3. 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.

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