When it comes to investing, there are various options available in the market. One such often overlooked option is municipal bonds. These bonds are debt securities issued by state and local governments to finance public projects. Despite typically offering lower nominal yields compared to corporate bonds, municipal bonds can be tax-exempt for certain investors, making them an attractive option for those looking to lock in income for the long term.
According to John Flahive, the head of fixed income at BNY Wealth Management, municipal bonds are predominantly favored by individual retail investors. These investors generally focus on bonds maturing within the next 10 years, creating a unique demand pattern in the market. The yield curve for municipal bonds is much steeper than that of the Treasury market, particularly in the 10 to 30-year range, presenting interesting income-generating opportunities for buyers willing to hold long-term bonds.
Flahive suggests that there are still significant opportunities in the long-end of the curve, particularly in the 15 to 20-year segment. By locking in higher yields over an extended period, investors can benefit from increased income potential, especially in the current economic climate where interest rate cuts are expected from the Federal Reserve. Flahive predicts a potential 75 basis point reduction in the benchmark rate by the end of the year, with further cuts possible if economic conditions deteriorate.
While municipal bonds offer attractive income-generating potential, there are risks associated with this market. Flahive points out that the sector’s heavy reliance on individual investors could make it vulnerable to fluctuations. Additionally, the spread between municipal bonds and ultra-safe Treasurys may be too narrow, considering the additional credit risks involved in municipal bonds. Flahive highlights the importance of considering credit quality when investing in municipal bonds, cautioning against complacency in the current market environment.
As the manager of the BNY Mellon Municipal Opportunities Fund (MOTMX), Flahive has been successful in delivering strong performance. The fund has earned a five-star rating from Morningstar, consistently ranking in the top quartile of its category over the past decade. This track record underscores the potential for attractive returns in the municipal bond market, provided investors carefully evaluate the associated risks and opportunities.
The municipal bond market offers a compelling opportunity for investors seeking to secure long-term income. By exploring the unique dynamics of this market, investors can capitalize on the potential for higher yields and tax advantages while managing the inherent risks effectively. With prudent investment strategies and a keen focus on credit quality, investors can unlock the full potential of the municipal bond market for their portfolios.