After a powerful begin to 2021, extra tailwinds might preserve the momentum going for municipal bonds and the Vanguard Tax-Exempt Bond ETF (VTEB).
The expectation of upper taxes subsequent yr might spur a flight to municipal bonds within the second half of 2021. To date, the specter of inflation and probably increased charges hasn’t turned buyers away from municipal bond merchandise.
“In the course of the first half of the yr, municipal bonds (munis) shrugged off the rise in long-term U.S. rates of interest and crushed their taxable counterparts,” an Advisor Views article famous. “Expectations for increased taxes in 2022 that could possibly be included in a possible stimulus bundle have stored demand excessive, whereas muni web provide was constrained the previous couple of months.”
Because the inventory market continues to flux up and down on Covid information, municipal bonds can present some degree of stability. Municipal bonds are historically much less unstable than their company bond counterparts.
VTEB tracks the Customary & Poor’s Nationwide AMT-Free Municipal Bond Index, which measures the efficiency of the investment-grade section of the U.S. municipal bond market. MUB seeks to trace the funding outcomes of the S&P Nationwide AMT-Free Municipal Bond Index, which additionally measures the efficiency of the investment-grade section of the U.S. municipal bond market.
The sampling method implies that each funds maintain a subset of bonds inside the index to copy the debt’s yield, period, and credit score high quality. This technique permits the funds to keep away from buying and selling costly bonds that would hurt efficiency. It additionally minimizes monitoring errors.
Continued Energy for Munis
Passage of the trillion-dollar infrastructure might additionally give municipal bonds a lift. Native authorities infrastructure initiatives are usually funded by municipal bonds.
“The driving power for the remainder of the yr ought to proceed to be technical demand, pushed largely by the U.S. authorities’s fiscal plan,” the Advisor Views article mentioned additional. “Barring a complete derailment of the infrastructure and social-stimulus packages, we will anticipate this demand to remain excessive and muni yields to stay tight to Treasuries, with returns approximating muni market yields. Any robust selloff in munis is more likely to rapidly snap again as buyers soar in to seize worth.”
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