Municipal bonds have long been a fixed income staple in retirement portfolios, and there are renewed reasons for income-seeking investors, exchange-traded funds like the iShares National Muni Bond ETF (NYSEArca: MUB).
MUB seeks to track the investment results of the S&P National AMT-Free Municipal Bond IndexTM. The fund typically invests at least 90% of its assets in the constituents of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of the investment grade segment of the US municipal bond market. Municipal bonds provide an additional layer of security for investors in the debt market as local government bonds typically have a lower default rate compared to corporate bonds.
"Favorable supply and demand momentum led to strong performance in municipal bonds in January, although interest rates rose sharply on vaccine optimism and expectations of additional fiscal stimulus," said BlackRock Research. “The S&P Municipal Bond Index posted a return of 0.56% over the month. High-yield munis saw the strongest gains, led by the more liquid Tobacco and Puerto Rico bonds. Munis' outperformance over government bonds has further stretched its rich valuations, pushing the Muni to Treasury ratio to an all-time high on the middle and long ends of the yield curve. "
MUB is a strong option for fixed income investors
Municipal bonds have long been recognized as one of the most reliable fixed income options. Enter Covid-19 and a once untouchable area could now be compromised by default settings. Even so, MUB and its friends are proving to be stable amid a flood of new issues.
Yields for Munis have steadily declined, and bond prices have been rising even before the coronavirus. Following the changes to the Tax Act of 2017, the demand for tax-exempt munis became more attractive in response to federal allowance caps for state and local taxes, especially in states with higher taxes. The tax law also reduced supply due to new limits on when governments can issue tax-exempt debt.
“The new offering exceeded the high expectations in January as the issuers took a wait-and-see approach to the new administration. The taxable emission remained proportionally increased at 29% of the total supply, which depressed the traditional tax-exempt emission. In the tax-free market, reinvestment of proceeds from maturities, calls, and coupons outperformed issuance by nearly $ 16 billion, creating a strong tailwind. New issues were oversubscribed an average of 11 times, ”said BlackRock.
Good news: February is usually a good time to hug Munis, which suggests that MUB could be a winner in the short term.
“February had positive total returns for 8 of the last 10 years. While rich valuations will be a drag, we expect strong demand to continue to outperform elevated but manageable emissions, ”added BlackRock. “We believe fundamentals are likely to benefit from additional tax subsidies and vaccine distribution should support longer-term revenue normalization. As the new government sets its agenda and puts tax policy at the center, we expect increased demand for tax-privileged assets such as Muni bonds. "
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