Fundamentals for Municipal Bonds Remain Healthy

It’s been a six-month slog for municipal bonds as inflation fears have racked one of the bond markets with some of the best investment-grade and yield options. Nonetheless, for investors who are still wary of municipal bonds, there’s solace in knowing that fundamentally, munis remain healthy.

“It’s hard to believe: Municipal bonds have suffered through one of the worst six-month stretches in their history, yet few marketwide credit concerns are on the horizon,” Vanguard noted in its latest fixed income perspective. “State and local tax collections have been strong in correlation with the robust economic growth of 2021. Credit fundamentals are as healthy as they have been in decades.”

One of the determinants of how healthy those credit levels stay is how local governments handle their surpluses, according to Vanguard. Those flush with cash will be best suited to handle a recession, should one occur.

“Maintaining that credit profile over the long term will be directly tied to how municipal fiscal surpluses are spent,” Vanguard added. “State and local governments that established or bolstered rainy day funds and resisted the temptation to use temporary surpluses to create enduring programs will be best positioned for future downturns.”

Cost-Effective Muni Exposure

Not sure where to start with getting municipal bond exposure? One fund to consider, especially for the cost-conscious investor, is the Vanguard Tax-Exempt Bond ETF (VTEB).

With a 0.05% expense ratio, the fund offers low-cost exposure to municipal debt. Comparable funds have an average expense ratio of 0.68%, based on Morningstar data.

VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).

For more news, information, and strategy, visit the Fixed Income Channel.

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