Municipal bonds offer investors a unique opportunity to generate tax-advantaged income. The income earned on muni bonds is free of federal taxes, making them particularly attractive to wealthy investors. In addition, investors residing in the state where the bond is issued may also avoid state taxes. According to BlackRock, the taxable equivalent yields on municipal bonds can reach over 6%, which means that the pretax yield a taxable bond would have to generate to match a tax-free muni bond is quite high. Sean Carney, head of municipal strategy at BlackRock, highlights that municipal bonds provide investors with high after-tax income and less volatility compared to other fixed income assets. These bonds also serve as a good diversifier to equity and equity-like risk.
In a recent article, BlackRock mentioned that value was being restored to the municipal bond sector after the market had gotten ahead of itself in late 2023. In June, munis started to tick back up, with the S & P Municipal Bond Index seeing a total return of 1.8% month to date, bringing the total return to 0.37% year to date. Issuance has also remained robust, indicating continued interest in municipal bonds. BlackRock advises investors to be nimble in their approach and emphasizes an up-in-quality bias in their portfolio. This increases liquidity and provides flexibility in the face of uncertain events such as elections, Federal Reserve meetings, and growing government deficits.
When it comes to credit quality, Carney prefers single-A rated credit in the primary market, but also believes that AA credit presents a good opportunity. BlackRock maintains a neutral stance on duration, aiming to match the duration of the benchmark. However, the firm started selectively adding duration in May, particularly focusing on the 13- to 15-year part of the curve. Carney emphasizes that investor preference plays a crucial role in deciding on duration and credit quality. He also sees opportunities in the high-yield space, where good income can be found. State and local governments are in sound financial shape, with upgrades outnumbering downgrades.
BlackRock specifically likes focusing on states that rely on consumption taxes, such as Florida, Nevada, Tennessee, and Washington. These states experienced positive revenue growth last year, as they do not have an income tax and instead favor sales tax. On the other hand, states like California and New York, which rely on personal income taxes, saw greater declines in revenue. Carney also highlights the importance of flagship universities, as they tend to have a large donor base and name recognition, making them more resilient to economic downturns. Essential revenue bonds are also favored by BlackRock for their steady streams of income and minimal volatility in credit ratings.
Municipal bonds present a unique opportunity for investors to earn tax-advantaged income while diversifying their portfolios. BlackRock’s insights on the market trends and investment strategies provide valuable information for investors looking to navigate the municipal bond landscape effectively.