The municipal bond landscape continues to receive significant interest in both flows and supply. That, and investors looking to get muni bonds exposure for tax purposes in portfolios, positions them for serious ETF interest. American Century Investments Vice President and senior portfolio manager, Joe Gotelli recently spoke with VettaFi on his views on the muni bonds market right now.
Key Takeaways:
- Gotelli identified the belly of the muni bond curve as a place for real opportunities.
- He asserted that front end richness and rising Treasury yields as risk areas to watch.
- American Century Investments provides muni exposure via ETFs like TAXF and CATF.
Gotelli, who joined the firm in 2008, noted that between the middle of June and July, he’s seen a “richening” on the front and long ends of the municipal yield curve. He cited the volatility of the taxable market as a key driver therein.
“It’s been a well-supported market by the inflow cycle that we’ve seen this year. So well supported that the AAA rated muni benchmark has drifted into an area of richness relative to treasuries,” he said.
He further explained that that has led his team to look at sectors and credit areas where they can get additional spread. Investors have the opportunity to capture some high levels of taxable equivalent yields, and that is helping contribute to some of the richness at the front and long ends of the curve.
See more: American Century’s Gotelli Talks Muni Bond Trends
The front end, with a two year bonds representing that side, comes in between one and a half and two deviations rich, he said. The back end, meanwhile, out in the 30-year range, he said, sat at more akin to one to one and a half deviations of rich valuations. Amid those details, however, the belly of the curve represents an area of opportunity.
“So as we think about where the relative value is in curve positioning, it is more in the belly of the curve than the front end and the very longest end of the curve currently,” Gotelli said.
ETF Options for Muni Bonds
As for where risk is most mispriced in the muni bonds landscape, Gotelli identified that front end richness as an area of concern. The muni market has “ignored” the recent rise in Treasury yields in that part of the market, he said. That comes under extra scrutiny amid continued volatility from the U.S.-Israel-Iran war.
“On the credit side of things, we’ve continued to see stress in certain sectors of the high yield market,” he said. “So we’re just seeing more dispersion than I would say mispriced risk. But I think there has to be an awareness of some large high yield issuers or large sectors in the high yield market that are undergoing some change.”
Security selection, then, becomes very important, Gotelli said. He pointed to growing downgrades for local governments, for example, facing continued post-COVID and inflationary pressures.
American Century offers a few muni bonds ETFs that can potentially help investors meet their goals. The American Century Diversified Municipal Bond ETF (TAXF ) and the American Century California Municipal Bond ETF (CATF ) both charge 27 basis points (bps).
Per Gotelli, the two have produced some appealing tax-adjusted yields. TAXF had a 6.28% taxable equivalent 30-day SEC yield, calculated with the highest Federal rate of 40.8%, as of July 14th. Meanwhile, CATF’s taxable equivalent yield came in at 7.6% for a 54.1% marginal tax rate.
Looking ahead, the funds offer adaptable, research-backed options to get into the space. For those wanting to reduce their tax bill, muni bonds offer some powerful tools.
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