Where should advisors and investors be looking to find the best opportunities in fixed income?
Given the current macroeconomic picture, now is certainly a good time to consider shifting one’s fixed-income portfolio. For instance, new leadership will be taking the reins at the Federal Reserve later this year. This may lead to more interest rate cuts from the Fed down the line, therefore cutting into cash rates as well.
Plus, ongoing macroeconomic uncertainty within the U.S. is still making it difficult to project what the next months may hold. Inflation concerns are still lingering, which could affect the pace and intensity of the Fed’s interest-rate cuts.
Putting all of this together, what kind of strategy could offer the strongest long-term potential for portfolios? One option could be to increase one’s allocation to municipal bonds.
Not only did municipal bonds generate strong returns in 2025, but many muni yields began the new year in a relatively elevated position. Furthermore, municipal bonds tend to perform well during bouts of inflation, due in part to their tax-exempt perks.
If one chooses to invest in municipal bonds, it could further pay off to allocate to intermediate-duration munis in lieu of short-duration bonds. Right now, intermediate-duration bonds are well positioned to benefit from a shift in Fed policy and a pro-growth agenda from the federal government.
BKMI: An Active Take on Undervalued Muni Exposure
For those looking to amplify their municipal bond exposure, the BNY Mellon Municipal Intermediate ETF (BKMI) could be worth a closer look. True to its name, BKMI looks to invest in municipal bonds through the benefits of an actively managed portfolio.
When choosing assets to invest in, BKMI’s portfolio team uses fundamental credit analysis to evaluate the relative value of different sectors and securities of the muni bond market. This is done to help identify undervalued sectors and securities for potential investment.
BKMI’s active management can provide distinct benefits over its passively managed competitors. In an economic environment dominated by not only uncertainty but also inflation and asynchronous fiscal policy as well, the flexibility active management provides could prove to be highly beneficial in the long term.
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