When it comes to investment opportunities, many investors tend to overlook a key area of the market that could offer significant benefits – municipal bonds. According to John Flahive, the bond chief at BNY Wealth Management, this slice of the market is often ignored, but it could be a valuable option for investors looking to lock in income for the long term.
Municipal bonds are debt securities issued by state and local governments as well as related entities to finance various projects and operations. While these bonds typically offer lower nominal yields compared to corporate bonds with the same credit rating, they come with the perk of being tax-exempt for certain investors, ultimately increasing their effective yield.
One of the unique aspects of the municipal bond market highlighted by Flahive is the shape of the yield curve. Unlike the Treasury market, which tends to have a more uniform yield curve, the muni curve is much steeper, particularly between the 10- to 30-year maturity range. This difference is driven by retail investors’ preference for shorter-term bonds, leading to increased income potential for those willing to invest in long-term munis.
Flahive emphasizes the potential benefits of buying and holding long-term municipal bonds, especially in the 15- to 20-year maturity range. Locking in higher yields over an extended period could be particularly attractive in the current market environment, especially with expectations of interest rate cuts by the Federal Reserve.
While there are opportunities in the municipal bond market, Flahive also points out some potential risks. With a heavy reliance on individual investors, the sector could be vulnerable to market fluctuations. Additionally, the relatively small spread between municipal bonds and ultra-safe Treasuries may not adequately compensate for the credit risks associated with munis.
For investors interested in gaining exposure to municipal bonds, Flahive manages the BNY Mellon Municipal Opportunities Fund (MOTMX). This fund has garnered a five-star rating from Morningstar, showcasing strong performance relative to its peers over the past decade. With a track record of outperforming its category, the fund could be a solid option for investors looking to capitalize on opportunities in the municipal bond market.
While the municipal bond market may not always be in the spotlight, it offers unique advantages for investors seeking income stability and long-term growth potential. By understanding the dynamics of the market, weighing the risks, and exploring investment options like the BNY Mellon Municipal Opportunities Fund, investors can tap into a valuable asset class that is often overlooked but rich in potential.