Value Propositions in the Municipal Bond Market

It doesn’t matter what type of bonds — they’ve all been affected to some degree by the rampant inflation fears circulating in the capital markets. From inverted yield curves to talks of recession, the narrative overall has been a negative one for bonds.

The U.S. Federal Reserve is expected to continue tightening monetary policy, which could create a recessionary environment. However, that also means there could be value in certain corners of the debt market.

“While rapid rate hikes have often triggered a recession, the U.S. economy may be able to weather the Fed’s moves because consumers have $2.5 trillion in savings, and both jobs and wages are rising,” Bloomberg reports, noting the analysis of Rick Rieder, chief investment officer of global fixed income for BlackRock Inc. “He expects stocks to trade higher by the end 2022 and sees return opportunities in investment grade municipal bonds as yields near 5%.”

“I’m pretty far from this recessionary construct when you’ve got this kind of firepower,” Rieder said.

Fixed income investors can opt for researching the universe of municipal bonds available on the debt market or opt for an easier solution: the Vanguard Tax-Exempt Bond ETF (VTEB A-). 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).

For more news, information, and strategy, visit the Fixed Income Channel.