Municipal bonds are often seen as a safe investment option for many investors. These are debts issued by state and local governments to raise funds for various projects. While they may offer lower yields compared to corporate bonds, the tax-exempt status for some investors can increase their effective yield significantly.
According to John Flahive, the head of fixed income at BNY Wealth Management, retail investors primarily dominate the municipal bond market. These individual investors typically gravitate towards bonds with shorter maturities, often focusing on those that mature within a decade. This unique demand pattern results in a steeper yield curve in the municipal bond market compared to Treasurys.
Flahive suggests that there are lucrative opportunities for investors willing to explore the long end of the municipal bond curve. In particular, he emphasizes the 15- to 20-year segment as an interesting area for potential investment. By locking in higher yields over an extended period, investors can benefit from consistent income streams.
With expectations of interest rate cuts by the Federal Reserve, long-term investments in municipal bonds may become even more appealing. Flahive predicts a significant reduction in the Fed’s benchmark rate, making long-term bond holdings a potentially lucrative option for income-seeking investors.
Despite the potential benefits, Flahive highlights certain risks associated with the municipal bond market. The heavy reliance on individual investors makes this sector vulnerable to market fluctuations. Additionally, the narrow spread between municipal bonds and Treasury securities may not adequately compensate for the added credit risks in municipal bonds.
Flahive manages the BNY Mellon Municipal Opportunities Fund (MOTMX), which has a stellar track record. Morningstar has awarded the fund a five-star rating, acknowledging its consistent performance in the top quartile of its category over the last decade.
While municipal bonds offer unique advantages for income-seeking investors, it is essential to carefully assess the risks involved. By exploring opportunities in the often overlooked long end of the municipal bond curve, investors may find compelling options to secure steady income streams in today’s evolving market landscape.