With municipal yields on the rise, munis are starting to become attractive again. Research from Raymond James that yields for munis “saw sharp increases" last week, “with the entire AAA curve finishing the week higher by 18 to 20 basis points.” This represents taxable equivalent yield increases of 29 to 32 basis points.
“The muni landscape is changing and there are opportunities available to clients now that rates are moving higher,” the research from Raymond James added.
Plus, following declines at the start of 2022, municipal bonds are now attractively valued. Raymond James noted: “Relative value for municipals, as measured by the 10-year municipal-Treasury ratio, increased from 87% to 92% last week.”
Since 1994, municipal bonds have demonstrated their resilience through difficult markets, including rising rates, credit stress, and the shock of COVID-19. Since 1998, munis have delivered positive returns over most rolling time periods.
For investors looking for value while avoiding risk, the Avantis Core Municipal Fixed Income ETF (AVMU) may be a good bet. The actively managed fund looks to outperform the S&P National AMT-Free Municipal Bond Index.
AVMU is home to 453 municipal bonds, 22.28% of which are special tax issues. Another 29% are either state or local general obligation bonds. AVMU’s interest rate sensitivity isn’t high, suggesting that investors unfamiliar with this ETF may be missing out as they leave other muni products.
AVMU could also be ideal for patient investors looking to circumvent credit risk, as the ETF allocates most of its weight (96%) to bonds rated AAA, AA, or A. The fund had a duration of 6.04 years as of the end of 2021.
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