Munis dig in

E*TRADE Securities2

07/12/17
The Fourth of July is in the rearview mirror and the dog days of summer will soon take hold. But don’t tell that to muni market observers—average daily trading volume for municipal bonds actually tends to heat up in June, July, and August. Perhaps perceived, and often rightfully so, as more tortoise than hare, a glut of maturities and calls has some experts anticipating reinvestment activity this summer could have the muni market hopping.

Don't sleep on muni bonds

Investors hungry for yield have kept munis in demand so far this year. As an example, the Bloomberg Barclays Municipal Bond Index checks in with a solid 3.43% year-to-date return.1 That’s a number that may be a surprise to some, considering what the muni landscape looked like last November when the index tumbled following the election.

Bloomberg Barclays Municipal Bond Index

Source: Bloomberg

Many projected that tax reform from the new administration, featuring lower personal and corporate tax rates, could make munis less attractive versus some of their taxable counterparts, even when factoring in munis’ tax exemptions. Talk of a boom in infrastructure spending and concerns about a potential flood of new issuance likely had investors wary as well.2

But, if anything, 2017 has reminded investors that Washington is often less than quick. And the resulting uncertainty from the legislative slog has had some investors returning to a traditionally reliable investment this year.

Getting involved

Consistency can be boring. But boring can be good when it translates into a consistent source of income potential. Enter munis. Investors interested in letting these bonds and their tax benefits ripple across their portfolios may want to consider a couple of basic, yet often effective, investment strategies:

  • Consider a ladder. Investors often find laddering municipal bonds with roughly equal-weighted maturities to be a good way to gain exposure to public debt. As the bonds mature, the principal is reinvested in new bonds with yields that reflect the prevailing market interest rates. With the Federal Reserve intent on normalizing monetary policy, this could be a way to help cushion investors against interest rate risk as well.
  • Funds can do the work too. Going the fund route through ETFs or mutual funds can free investors from the decision-making that accompanies investment, or reinvestment, in individual bonds. Funds also offer exposure to an array of different issuers and credits, meaning individual municipalities comprise only a small piece of the fund.      

It's not always a walk in the park

The growing sense that tax reform isn’t on the immediate horizon, as well as an increase in debt coming due, may be driving what some consider a solid under-the-radar performance from munis year to date.

That is not to say that munis have been in the shadows, or free of volatility. In May, Puerto Rico sought court protection from roughly $123 billion in debt and pension liabilities. Earlier this month, Illinois lawmakers finally broke a two-year budget impasse, one that had Standard & Poor’s threatening to lower the state’s bonds to junk status. And Hartford, Connecticut, the capital of America’s richest state,3 now finds itself on the brink of bankruptcy.

While past performance does not guarantee future results, muni bonds have traditionally been on the safer side of the investment product spectrum. The examples above represent a few outliers in a market of approximately 100,000 issuers. Defaults are rare, but there are risks. So keeping track of the municipal news flow can help investors determine how to diversify their exposure and find some of that steady income munis may provide.

Interested investors can explore laddered bond portfolios and other Fixed Income Separately Managed Account (FISMA) options at etrade.com. Also check out E*TRADE Capital Management’s exclusive All-Star list of mutual funds and ETFs for a number of municipal bond fund choices. Need some extra help? E*TRADE’s dedicated team of experienced Fixed Income Specialists can provide guidance on our deep inventory of tools available to investors.

 

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1. As of July 10, 2017, according to https://www.bloomberg.com/quote/LMBITR:IND. The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.

2. Fried, Carla. “The Muni Market Turns Toward Washington,” The New York Times, 14 Apr. 2017. https://www.nytimes.com/2017/04/14/business/mutfund/trump-municipal-bonds.html

3. Braun, Martin Z. “In America’s Richest State, the Capital Flirts With Bankruptcy,” Bloomberg, 7 Jul. 2017. https://www.bloomberg.com/news/articles/2017-07-07/in-america-s-richest-state-the-capital-flirts-with-bankruptcy