The municipal bond market is ripe for bargain hunting

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A summer rally in the bond market could falter, giving way to municipal bonds to offer fixed-income investors a bargain as the threat of higher interest rates continues in the second half of 2022.

“When the herd of investors is rushing in one direction, it can pay off to go in the opposite direction, but only if you exercise caution,” potential investors warned in a Wall Street Journal report.

With capital markets expecting another 75 basis point rate hike, it could already be priced into bond markets. As such, it presents a potential buying opportunity for those looking for municipal bonds.

“Consider municipal bonds, long cherished by individuals seeking to earn tax-free investment income,” the WSJ report added. “Their prices have fallen this year as interest rates rise and bonds have generally entered a bear market.”

The WSJ noted, based on data from Refinitiv Lipper, that in the first eight months of 2022, about $83 billion flowed out of municipal bond funds. This is the largest outflow on record, and there are still a few months left in 2022, as inflation fears plagued bond markets for much of the year.

As mentioned, this is an opportune time to gain exposure to municipal bonds at cheap prices. It’s also an ideal opportunity to get cheaper high-yield municipal debt.

“People are perking up and excited about having the opportunity to earn that higher income,” says Alexa Gordon, municipal bond portfolio manager at Goldman Sachs Asset Management.

An all-inclusive Muni ETF option

Instead of holding various municipal bonds, exchange-traded funds (ETFs) offer a holistic approach. They include various debt securities in a low cost position.

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 0.05%, 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).

For more news, insights and strategy visit the Fixed income channel.

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