Investors Are Seeking Municipal Bonds Amid Volatility


According to a Financial Advisor IQ article, municipal bonds are generating high interest from investors who are typically the ideal candidates for these fixed income options — retirees. Though spooked by the recent bond sell-off plaguing the market in the first half of 2022, they’re returning amid recession fears.

“Retirees have flocked to institutional municipal bond markets amid market volatility even despite substantial losses in the segment, according to a new report,” the article said, noting the report from electronic marketplace provider Tradeweb.

Institutional investors have been exiting municipal bond flows amid the first half volatility as inflation fears have racked not just the muni market, but the entire bond market. That void is getting filled by retirees who typically flock to these debt issues due to their low credit risk and stable income.

Retail investors overall have been heading into municipal bonds, according to the report. One of the prime reasons is electronic trading, which allows more retail capital to access this corner of the bond market.

The outflux of institutional investors is creating a symbiotic relationship with retail investors. Institutional investors looking to offload their munis have willing buyers in the retail market ready to go with the help of electronic trading technology.

“Historically, those two classes of investors would never cross paths, but — thanks to recent advances in electronic trading that have given retail wealth managers a direct conduit to the institutional sell-side — retiree investors have come to wield big buying power in the institutional municipal bond markets,” Tradeweb said.

An Easier Way to Access Munis

Exchange traded funds (ETFs) have also helped spur more access to munis with funds like the Vanguard Tax-Exempt Bond ETF (VTEB). With a 0.06% expense ratio, the fund offers low-cost exposure to municipal debt.

VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).

“Vanguard provides us with some very critical factors when evaluating a bond fund. With over 6000 bonds, individual bond risk is basically non-existent. This is also reflected in that the Top 50 holdings are only 13% of the ETF,” a Seeking Alpha article by Retired Investor noted.

For more news, information, and strategy, visit the Fixed Income Channel.


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