Investors looking for ways to secure long-term income may find a potential solution in an overlooked segment of the municipal bond market. Municipal bonds, issued by state and local governments, offer investors a unique opportunity to diversify their portfolios and benefit from tax-exempt returns. While these bonds typically yield lower than corporate bonds of similar credit ratings, their tax advantages can result in higher effective yields for certain investors.
The Yield Curve Discrepancy
According to John Flahive, the head of fixed income at BNY Wealth Management, retail investors in municipal bonds often focus on shorter-term maturities, typically within the next 10 years. This preference creates a discrepancy in the yield curve of the municipal bond market compared to the Treasury market. The steeper yield curve of municipal bonds, where long-term paper yields more than shorter-term debt, presents an opportunity for investors willing to hold onto their investments for an extended period.
Flahive suggests that investors explore opportunities in the 15- to 20-year segment of the municipal bond market, where locking in higher yields over a longer period may prove beneficial. With the Federal Reserve expected to cut interest rates in the near future, long-term investments in municipal bonds could offer a way to secure higher income amidst market uncertainties.
While municipal bonds present an attractive investment opportunity, Flahive warns of potential risks associated with the sector. The heavy reliance on individual investors makes the market vulnerable to fluctuations, and the narrowing spread between municipal bonds and Treasurys may not adequately account for the additional credit risks involved. Flahive advises investors to carefully assess the credit quality of municipal bonds before making investment decisions.
As the manager of the BNY Mellon Municipal Opportunities Fund (MOTMX), Flahive has overseen a fund that has consistently performed well in its category. With a five-star rating from Morningstar and a track record of outperforming its peers, the fund offers investors a way to access the potential opportunities in the municipal bond market under the guidance of experienced professionals.
Overall, while the municipal bond market may come with its own set of risks and challenges, exploring long-term opportunities in this sector could prove to be a valuable addition to an investor’s portfolio. With the potential for higher yields and tax advantages, municipal bonds offer a unique avenue for income generation in a shifting economic landscape. Investors willing to take a long-term view and carefully assess the risks involved may find success in this often overlooked segment of the fixed income market.