Investors aren’t just piling into stocks when it comes to the infrastructure rally following the signing of the trillion-dollar bill into law; municipal bonds are also seeing increased demand.
U.S. president Joe Biden turned the bill into law on Monday, putting pen to paper after it successfully passed through the House of Representatives. During the past couple of weeks, investors have been piling into munis with the expectation that the infrastructure bill will require local government debt to fund forthcoming projects.
“Municipal bond prices rallied over the past two weeks as investors abandoned hopes for a flurry of new bonds from Congress’s $1 trillion investment in U.S. infrastructure,” the Wall Street Journal reports. “The yield on a 10-year tax-exempt triple-A muni bond has fallen 8% since Oct. 28, according to ICE Data Services. Bond yields fall as prices rise.”
The WSJ report noted that over the long-term horizon, “any investment in roads, sewers and trains is generally seen as good for the market since it helps boost municipal credit.” Furthermore, the trillion-dollar package could spur a record issuance of municipal bonds since some projects won’t get the full breadth of funding necessary for certain projects, leaving local government to foot the bill.
“In many cases the local contribution will come from municipal bonds,” said Patrick Brett, head of municipal debt capital markets at Citigroup and chair of the Municipal Securities Rulemaking Board.
Investors looking to get municipal bond exposure wrapped up in an ETF can look at the Vanguard Tax-Exempt Bond ETF (VTEB ). With a 0.06% expense ratio, the fund offers low-cost exposure to municipal debt.
VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).
“The fund employs an indexing investment approach designed to track the Standard & Poor’s National AMT-Free Municipal Bond Index using a sampling technique to closely match key benchmark characteristics,” the Vanguard product page says. “All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in securities held in the index.”
For more news, information, and strategy, visit the Fixed Income Channel.
