Long prized as a refuge for risk-averse income investors, municipal bonds have widely been highlighted as one corner of the bond market that could thrive this year. That’s so even if the Federal Reserve proves reluctant regarding lowering interest rates.
That could bode well for exchange traded funds such as the ALPS Intermediate Municipal Bond ETF (MNBD ). Potentially adding to the allure of MNBD in 2025 are expectations that actively managed ETFs will continue their ascent due in large part to fixed income offerings.
Beyond asset allocators’ burgeoning enthusiasm for actively managed fixed income ETFs – a theme industry observers believe will be durable – MNBD could have several other fundamental tailwinds that lead to solid performance this year.
MNBD Has Momentum
The combination of a solid U.S. economy and still-elevated real interest rates is compelling for municipal bond investors. That’s because it’s created a scenario in which taxable-equivalent yields are enticing.
“On a taxable-equivalent yield basis, municipal index yields now exceed those of cash and also rival fixed income investments of higher risk,” noted J.P. Morgan Private Bank. “In high tax states like New York and California, A-rated municipal bonds offer taxable-equivalent yields (TEYs) of nearly 7.0%. Additionally, the mean ten-year cumulative default rate for all investment grade municipals is only 0.10%.”
Interest rates are always a factor, with nearly all bonds and ETFs such as MNBD. But today’s relatively high starting yields imply that funds like MNBD could be poised for long-term success.
“Looking further into the future, J.P. Morgan Asset Management’s latest Long-Term Capital Market Assumptions project that the 10-year U.S. Treasury (UST) yield will fall to 3.9% over the next 10 to 15 [years. That’s] down from about 4.4% today,” added J.P Morgan. “We expect that municipal yields will follow. With this outlook, we believe now is a time for tactical and strategic asset allocators to consider municipal bonds.”
And there’s more good news. Broadly speaking, state finances are strong. That’s true of the largest issuers of tax-exempt debt. This group comprises California, Florida, Illinois, New Jersey, New York, Pennsylvania, and Texas. Those states and others have rainy day funds flush with cash. Those funds can support municipal bond payment obligations in the event of recession.
“These rainy day funds—which are typically dedicated cash reserves set aside for unexpected expenses or an unforeseen revenue change—have grown steadily since 2011, when they equaled just 1.8% of general fund spending (in the wake of the global financial crisis),” concluded J.P. Morgan.
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