IThe focus on infrastructure and investors looking to cut higher taxes have helped municipal bonds generate more than $ 60 billion in cash flow in 2021.
Municipal bonds offer investors a way to offset the effects of rising taxes. This is certainly the case by 2022 after President Biden’s enactment of the trillion-dollar infrastructure package.
“Investors have put more money into municipal bond funds so far this year than they have in decades, providing the fuel for state and city borrowing to fund new bridges, sewers and other state and local projects to a second consecutive record in 10 years, ”reports the Wall Street Journal.
This influx of funds translates into municipal bonds capturing a larger share of the debt market. Investor habits are also changing, with more and more investors looking to hold munis temporarily rather than long term.
“Municipal bond funds now hold an unprecedented 24% of outstanding debt against 16% five years ago, according to Federal Reserve data,” adds the WSJ. “This move marks the latest step in a fundamental shift in a buy and hold market where individual investors quietly collect interest year after year.”
In addition, supply and demand fundamentals also affect the municipal bond market. Demand for munis is increasing at a time when supply is slow, pushing bond prices up as investors trade the yield for the quality that munis can offer.
“In general, there is a better credit environment, you have a lower offer [and] more demand, and then you just have investors who are willing to take more risk to replace the return they used to get on their high-quality bonds, ”said Eric Friedland, director of municipal bond research at asset manager Lord Abbet.
Obtain Muni exposure in an ETF
One place to get tax-free exposure to municipal bonds is through an exchange-traded fund (ETF) wrapper with funds like the Vanguard Tax Exempt Bond ETF (VTEB). With an expense ratio of 0.06%, 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 US municipal bond market. This index includes municipal bonds of issuers that are primarily governments or state or local agencies whose interest is exempt from US federal income tax and Federal Alternative Minimum Tax (AMT).
For more news, information and strategies, visit the website Fixed income channel.
Learn more at ETFtrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.