Investors seeking to secure long-term income should consider exploring a segment of the municipal market that is often overlooked. Municipal bonds, which are issued by state and local governments to finance their operations, can be a valuable asset for income-focused investors. While these bonds typically offer lower nominal yields compared to corporate bonds, their tax-exempt status for certain investors can boost their effective yield.
John Flahive, the head of fixed income at BNY Wealth Management, highlights that individual retail investors dominate the municipal bond market. These investors usually gravitate towards bonds with maturities within the next decade, resulting in a unique yield curve compared to the Treasury market. The steeper yield curve in the municipal market, with longer-term bonds offering higher yields than short-term debt, presents an opportunity for investors to generate increased income by holding onto these bonds over an extended period.
Flahive suggests that the 15- to 20-year segment of the municipal bond market is particularly intriguing for investors looking to capitalize on higher yields. With the Federal Reserve anticipated to lower interest rates in the near future, locking in these elevated yields for an extended period could be advantageous. BNY Wealth Management predicts a significant reduction in the Fed’s benchmark rate, making long-term municipal bonds an appealing option for income-seeking investors.
While municipal bonds offer lucrative income potential, Flahive warns of certain risks associated with investing in this market. The reliance on individual investors leaves the sector vulnerable to market fluctuations, and the current spread between municipal bonds and ultra-safe Treasurys may not adequately compensate for the additional credit risks in munis. Flahive emphasizes the importance of considering credit quality when investing in municipal bonds, as overlooking this factor could prove costly in the long run.
In addition to his role as head of fixed income at BNY Wealth Management, Flahive manages the BNY Mellon Municipal Opportunities Fund (MOTMX). This fund, which boasts a five-star rating from Morningstar, has delivered strong performance within its category over the past decade. Investors looking to capitalize on the income potential of the municipal bond market may find the BNY Mellon Municipal Opportunities Fund to be a compelling investment option.
Leveraging the income-generating potential of municipal bonds can be a strategic move for investors seeking to build a diversified investment portfolio. By exploring opportunities in the long-end of the municipal bond curve and carefully assessing credit risks, investors can maximize their income potential and capitalize on the unique dynamics of the municipal market.