The Municipal Bond Market is Facing Its Own Challenges Amid Pandemic

The U.S. Federal Reserve came to the rescue with its quantitative easing program, propping up corporate and high yield bonds. The municipal bond market will face its own challenges as the economy pushes forward in a post-coronavirus world.

One case in point is the $900 million bond offering from the Metropolitan Transportation Authority.

“The new MTA deal will likely be a test case for one of the more severely impacted revenue bond issuers,” said Jeffrey Lipton, Oppenheimer head of municipal research and strategy.

Per a CNBC report, “issuers of state and local debt are facing a crisis unlike any other, with the sudden loss of revenues nationally from income taxes, sales taxes, parking, and even hotel room taxes. Collectively these governments are seeking another $750 billion from the federal government, a request that is expected to pit Republicans against Democrats and red states against blue states.”

“This is not going to be just a federal bailout of the states. On the other hand, this will be an ongoing discussion,”   said Treasury Secretary Steven Mnuchin on CNBC Tuesday. But he said it makes sense to help states with high expenses from the coronavirus, like New York and New Jersey, but not to help states just because they’ve mismanaged their finances.

Despite the forthcoming challenges, 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.

For more relative market trends, visit ETF Trends.