Municipal Bond Juice Still Worth the Squeeze

Without the support of rate cuts by the Federal Reserve, it’s been a lethargic year in terms of performance by municipal bonds and the related ETFs, but that doesn’t mean advisors and fixed income investors should ignore this bond segment. In fact, the current municipal bond environment may be ripe for active management. It indicates that market participants may want to evaluate ETFs such as the ALPS Intermediate Municipal Bond ETF (MNBD) . MNBD, which turned four years old in May, carries a trailing 12-month yield of 3.31%. That’s all the more attractive when considering the low credit risk associated with this ETF. On a related note, over the long-term, munis have lower default rates than corporate debt, confirming the relative safety offered by the asset class — safety that’s amplified when embracing active management.

All things considered, MNBD and its peers are holding up fairly this year, considering ample supply in the muni market. The good news is that there’s appetite for those issues. “That appetite has held even against a record supply backdrop. With municipal issuance forecast to approach $600 billion this year, the market has absorbed the volume without disruption, driven largely by retail investors, separately managed accounts and ETFs drawn to the after-tax income opportunity,” according to Bloomberg.

MNBD’s status as an actively managed ETF could prove attractive to advisors and investors ahead of the 2026 midterm elections, due to potential state and local tax changes. The Federal tax advantages of municipal bonds are intact, but come 2027, new tax laws could be on the books in an array of states, potentially altering the muni tax advantage landscape. “However, investors must pay close attention to political and policy uncertainty, as it could pose additional market risk. Changes in state and local representation in the upcoming 2026 elections, fiscal priorities, and inflation expectations can all affect Muni valuations in the months ahead,” added Bloomberg.

Even with that, it’s possible that investors’ primary focus, as it relates to municipal bonds and funds such as MNBD, will remain duration. With rate cuts appearing unlikely over the near-term, an advantage offered by MNBD is its intermediate-term status, implying it has lower correlations to equities than longer-dated bond funds. “Still, for most market participants, duration risk stays the dominant focus. Inflation and oil price volatility, along with uncertainty about future Fed leadership, continue to influence investor positioning across fixed-income markets,” observed Bloomberg.