Investors seeking tax-advantaged income often turn to municipal bonds as a reliable investment option. These bonds offer income that is free from federal taxes, making them particularly attractive to high-net-worth individuals. Additionally, investors residing in the same state where the bond is issued may also benefit from avoiding state taxes. The taxable equivalent yields on municipal bonds can reach over 6%, making them a lucrative investment opportunity for many.
According to Sean Carney, head of municipal strategy at BlackRock, municipal bonds offer investors high after-tax income with less volatility compared to other fixed-income assets. These bonds remain a good diversifier to equity and equity-like risk, providing stability in uncertain market conditions. Despite the market getting ahead of itself in late 2023, BlackRock noted that value was being restored to the sector in May.
As the municipal bond market began to recover in June, BlackRock emphasized the importance of being nimble when navigating investment opportunities. The firm has an up-in-quality bias in its portfolio, focusing on single-A rated credit in the primary market. In addition to AA-rated investments, BlackRock also sees potential in the high-yield space, offering good income prospects for investors. Carney highlighted the sound financial shape of state and local governments, with upgrades surpassing downgrades.
BlackRock specifically favors states that rely on consumption taxes, such as Florida, Nevada, Tennessee, and Washington, for positive revenue growth. States focused on personal income taxes, like California and New York, experienced greater declines in revenue. The firm also sees opportunities in flagship universities and essential revenue bonds, noting their stability and consistent income streams. These investment targets provide long-term value for investors seeking reliable returns.
When it comes to duration and credit quality, BlackRock approaches the market with a neutral stance, aiming to match the duration of the benchmark. However, the firm started selectively adding duration in May, particularly in the 13- to 15-year part of the curve. Carney emphasized the importance of investor preference when considering duration and credit quality, tailoring investment strategies to meet individual goals and risk tolerance.
Municipal bonds offer investors a tax-advantaged income stream with opportunities for growth and stability. By staying informed about market trends and being nimble in investment decisions, investors can make the most of the benefits that municipal bonds have to offer. With a strategic approach to portfolio management and a focus on high-quality assets, investors can achieve long-term financial success in the municipal bond market.