Sean Carney, head of municipal strategy at BlackRock and chief investment officer of the firm’s municipal bond funds, emphasizes that municipal bonds provide investors with high after-tax income and lower volatility compared to other fixed income assets. They also serve as effective diversifiers against equity and equity-like risks. Municipal bonds are particularly attractive for investors in higher tax brackets due to their federal tax-exempt status, with additional benefits for residents of the issuing state who may also avoid state taxes on their bond income.
Carney underscores the competitive yields offered by municipal bonds, noting that their taxable equivalent yields can exceed 6%, making them a compelling alternative to taxable bonds.
Recent insights from BlackRock highlight the resilience of municipal bonds despite market fluctuations. After a period of overvaluation in late 2023, the sector has rebounded. As of June, the S&P Municipal Bond Index has shown a modest recovery, delivering a monthly return of 1.8% and a year-to-date return of 0.37%. This recovery is supported by ongoing confidence in the sector, evidenced by steady new bond issuances. Carney advises investors to stay flexible to seize current market opportunities, emphasizing municipal bonds’ stability and tax advantages.
BlackRock recommends focusing on high-quality municipal bonds for liquidity and risk management amidst economic uncertainties. They prefer bonds rated single-A or AA in the primary market, balancing risk and reward. Regarding duration, BlackRock maintains a neutral stance aligned with benchmarks, selectively extending duration in areas offering favorable yields. Carney also highlights the potential in high-yield municipal bonds for investors seeking higher returns, noting the fiscal strength of state and local governments, which are seeing more credit upgrades than downgrades. This strategy enables investors to align their portfolios with their risk tolerance and income goals, ensuring a strategic fit within their broader financial objectives.
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