Are you an investor looking to secure stable income for the long term? If so, you may want to consider exploring a often overlooked segment of the municipal bond market, as suggested by the bond chief at BNY Wealth Management.
Municipal bonds are issued by state and local governments as well as related entities in order to finance their expenditures. While these bonds typically offer lower nominal yields compared to corporate bonds of the same credit rating, they also come with the benefit of potential tax exemptions for certain investors, boosting their effective yield.
John Flahive, the head of fixed income at BNY Wealth, highlighted that individual retail investors are the primary buyers of municipal bonds. This group tends to focus on bonds maturing within the next 10 years, creating a distinct “yield curve” in the municipal bond market compared to the Treasury market.
The steeper yield curve in municipal bonds, where shorter-term debt yields less than long-term debt, presents an opportunity for investors to secure higher income annually by holding onto long-term bonds. Flahive specifically mentioned interest in the 15- to 20-year segment of the curve as particularly intriguing.
In the current market environment, where the Federal Reserve is expected to embark on interest rate cuts, locking in higher yields over a lengthy period may seem appealing to investors. BNY Wealth anticipates the Fed to decrease its benchmark rate by 75 basis points by year-end, with potential for a larger reduction if economic indicators weaken.
However, it’s important to consider the risks associated with municipal bonds. Flahive cautioned that the reliance on individual investors makes this sector “vulnerable,” and the spread between municipal bonds and ultra-safe Treasuries may not adequately compensate for the additional credit risks present in munis.
Flahive also manages the BNY Mellon Municipal Opportunities Fund (MOTMX), which has received a five-star rating from Morningstar for its consistent performance within the top quartile of its category over the past decade.
For investors seeking to diversify their income-generating portfolio and capitalize on the potential offered by the municipal bond market, exploring the often overlooked long-term segment of this market may prove to be a valuable strategy. Stay tuned to Extreme Investor Network for more insights and tips on maximizing your investment opportunities in the ever-evolving financial landscape.