The municipal bond market could pause next month


LLike the rest of the bond markets, municipal bond markets trended lower at the start of 2022. However, they could get some downside reprieve as municipal bond investors may look to reinvest their payouts.

“The municipal bond market, battered by rapidly rising interest rates and a near-record exodus of mutual fund investors, looks set to get some support next month,” said one. Bloomberg Report Remarks.

“Citigroup Inc. strategist Jack Muller estimates that the amount of cash that state and local government bondholders will receive in principal and interest payments in May will exceed the volume of new debt sales from approximately $9.5 billion,” the report added. “Since investors typically reinvest these payments, this will likely increase demand for the bonds.”

As mentioned, this is a welcome change of pace as the Bloomberg report notes a record exodus from municipal bond mutual funds. It could also pave the way for beneficial purchases of municipal bonds in exchange-traded funds (ETFs).

Get hands-on Muni exposure

The debt market offers a plethora of options for investors looking to tap into muni bonds. However, Vanguard has a simpler solution to gaining convenient muted exposure in an ETF.

One place to get tax-free municipal bond exposure is through an ETF wrapper with funds like the Vanguard Tax-Exempt Bond ETF (VTEB). With an expense ratio of 0.06%, the fund provides low-cost exposure to municipal debt.

VTEB tracks Standard & Poor’s National Municipal Bond Index without AMT, which measures the performance of the higher quality segment of the US municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interest is exempt from US federal income tax and alternative federal minimum tax (AMT).

The fund comes with a 30-day SEC yield of 2.56% as of April 27. The average duration is 4.6 years (as of March 31), so interest rate risk is mitigated as the expectation of higher rates continues for the remainder of 2022.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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