Investing in municipal bonds can be a lucrative way for investors to earn tax-advantaged income. These bonds offer income that is free from federal taxes, making them an attractive option for wealthier individuals. In addition, investors who reside in the state where the bond is issued may also avoid state taxes, further increasing their potential returns. Sean Carney, head of municipal strategy at BlackRock, explains that taxable equivalent yields on municipal bonds can reach over 6%, making them a compelling choice for investors seeking high after-tax income.
BlackRock has observed that the municipal bond market has seen a resurgence in value after experiencing rapid growth in late 2023. In June, municipal bonds started to see an uptick, with the S & P Municipal Bond Index recording a total return of 1.8% month to date. This trend highlights the potential opportunities for investors in the municipal bond sector. Carney emphasizes that remaining nimble is key to capitalizing on these opportunities in the market.
BlackRock has a preference for high-quality bonds in its portfolio, aiming to increase liquidity and mitigate risks in uncertain market conditions. Carney highlights the importance of credit quality, pointing out that single-A rated credits in the primary market and AA rated bonds present favorable opportunities for investors. In terms of duration, BlackRock maintains a neutral stance, aligning its portfolio duration with the benchmark. However, the firm has started selectively adding duration in specific parts of the yield curve, such as the 13- to 15-year range.
Within the municipal bond market, BlackRock sees opportunities in states that rely on consumption taxes rather than income taxes. States like Florida, Nevada, Tennessee, and Washington, which favor sales taxes, have seen positive revenue growth. Carney also highlights the resilience of flagship universities and essential revenue bonds, emphasizing the stability of these investments. These bonds provide steady streams of income and are less susceptible to credit rating volatility, making them attractive options for long-term investors.
Investing in municipal bonds can be a valuable strategy for generating tax-advantaged income. By staying informed about market trends, following a disciplined investment approach, and identifying potential opportunities, investors can tap into the benefits of municipal bonds. With careful consideration of credit quality, duration, and market conditions, investors can build a diversified portfolio that offers stability and attractive returns in the long run.