Tapping into the full potential of municipal bonds

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As the impact of the coronavirus pandemic continues to be felt, declining tax revenues have put pressure on many state and local governments. This has led many investors to wonder about the outlook for municipal bonds.

BNY Mellon Investment Management, through its investment firm Mellon, provides investors with an institutional pedigree in seeking low-volatility opportunities for municipal investing.

Dan Rabasco, head of municipal bonds at Mellon, points out that the benefits of municipals remain intact. These include:

  • Tax-free income: Municipal bonds have the potential to deliver attractive tax-equivalent yields relative to other fixed income sectors while taking on lower default risk than corporate bonds.
  • Total return: Over the past 30 years, municipal bonds, as measured by the Bloomberg Barclays Municipal Bond Index, have delivered positive average monthly returns through all interest rate cycles.1
  • Diversification: Municipal bonds have the potential to offset volatility from other higher-risk areas of a portfolio, given their lower correlations.

Despite the current economic uncertainty, municipal bond issuers have several advantages that may help them weather the storm:

  1. States and municipalities have the ability to raise taxes and cut expenses, and revenue bond issuers can levy charges and fees.
  2. The Federal Reserve (the Fed) provided liquidity to the municipal market by expanding its bond buying program.
  3. In addition to the CARES Act, there are hundreds of billions of dollars in proposed federal relief funds aimed at states and local governments.

In addition, “Even with the impacts of the pandemic on revenues, municipal bond default rates are exceptionally low—much lower than comparably rated corporate bonds,” says Rabasco.

Disciplined research for a fragmented market

The municipal bond investment team at Mellon believes that the overall credit picture for investment grade municipal bonds remains solid. In fact, May marked the fifth best month ever for municipal bonds.2

While some weaker issuers may face the possibility of default, fundamentally sound credits should be able to overcome the challenges, says Rabasco. The potential federal aid package, known as the HEROES Act, and additional Fed liquidity could even spark a rally in municipals, leading to attractive excess returns.

That said, navigating the municipal market will require an active approach to security selection, coupled with a bias toward high-quality securities. Robust fundamental analysis from a skilled and experienced manager can help.

The Mellon approach to municipals

Drawing on more than 80 years of fixed-income experience, Mellon believes the best way to preserve capital and potentially earn after-tax return is to make meaningful commitments to low-volatility opportunities.

BNY Mellon Opportunistic Municipal Securities Fund offers risk-managed access to a diversified portfolio of municipal securities. The Fund seeks to maximize current income exempt from federal income tax to the extent consistent with the preservation of capital.

As the world’s 3rd largest Fixed Income manager*, we offer a full lineup of municipal bond mutual funds. We can help you determine the role of municipal fixed income in your portfolio.

To learn more about the Fund, click here.

1 Source: Bloomberg as of October 11, 2019. Weekly data, Feb 3, 1989 to Oct 11, 2019.

2 Source: BlackRock, Municipal Market Insight, “Muni bonds spring back,” June 9, 2020. https://www.blackrock.com/us/individual/insights/municipal-monthly

* Pensions & Investments, May 2019. Ranked as of 12/31/18.

 

Investors should consider the investment objectives, risks, charges, and expenses of any mutual fund carefully before investing. Download a prospectus, or a summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing. Investors should discuss with their financial professional the eligibility requirements for Class I and Y shares, which are available only to certain eligible investors and the historical results achieved by the fund’s respective share class.

All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines.  Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.  High yield bonds involve increased credit and liquidity risk than higher rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis.

Diversification cannot assure a profit or protect against loss.

Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others. To the extent the Strategy may overweight its investments in certain countries, companies, industries or market sectors, such positions will increase a clients exposure to risk of loss from adverse developments affecting those countries, companies, industries or sectors.

This material has been distributed for informational purposes only. It is educational in nature and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. This material does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor. Views expressed are those of the author(s) stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this communication and subject to change. Forecasts, estimates and certain information contained herein are based upon proprietary research and are subject to change without notice. Certain information has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

Mellon is a global multi-specialist investment manager dedicated to serving our clients with a full spectrum of research-driven solutions. Mellon Investments Corporation (Mellon) is a registered investment adviser and an indirect subsidiary of The Bank of New York Mellon Corporation.

BNY Mellon Investment Advisor, Inc. Mellon Investments Corporation and BNY Mellon Securities Corporation are affiliated with The Bank of New York Mellon Corporation.

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