Broad measures of investment-grade municipal bonds didn’t do much of anything in the first half of 2024. However, some market observers believe the asset class could be poised for some upside as the second half unfolds.
Should that outlook be validated, exchange traded funds such as the ALPS Intermediate Municipal Bond ETF (MNBD ) could garner renewed attention. In fact, MNBD could be one of the ideal ETFs with which to tap a potential muni bond resurgence. Some experts believe active management could be the preferred way to bet on munis going forward.
Not surprisingly expectations the Federal Reserve will sooner lower interest rates support the case for MNBD. There’s even talk that could happen later this month. There are no guarantees a July rate cut will materialize. Still, recent inflation data suggests rate cuts are a legitimate possibility at some point in the second half.
Time Could Be Right for MNBD
Even without the benefit of Fed rate cuts, there’s momentum for the thesis that there’s limited near-term upside for muni bond yields. That’s important for investors mulling MNBD because bond yields and prices move inversely. Plus, there’s some interesting historical precedent to consider as it relates to municipal debt.
“It’s rare for the broad muni market to start the year on a rough note. It has only happened six times over the past 30 years and in three of those instances, the market went on to recover those early losses and posted a positive total return for the year,” noted Cooper Howard of Charles Schwab.
Howard also highlighted the importance of the muni-to-Treasury ratio. This gauges the allure of AAA-rated munis over Treasurys before accounting for tax implications. That ratio is hovering around its lowest levels in 20 years. This indicates that after-tax yields on Treasurys would need to rise significantly to make U.S. government debt more attractive than munis. Plus, supply/demand could be supportive of ETFs such as MNBD.
“The size of the muni market continues to be constrained, yet demand for tax-exempt income has increased. Issuance this year has been strong but so has demand—especially for separately managed accounts, which tend to target higher-rated issuers in the intermediate part of the curve,” adds Howard.
While large near-term upside isn’t to be expected for municipal bonds, near-term downside for MNBD and other muni assets is likely limited because federal income taxes are unlikely to rise (it’s an election year), supply isn’t likely to increase and credit quality remains stout.
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