Vanguard Expects Muni Bond Renaissance Due to Higher Yields

According to Vanguard, investors that allocated part of their portfolios to low-yielding municipal bonds at the beginning of last year should now be looking forward to the prospect of higher income, thanks to a rapid rise in rates. In a fixed-income report for the first quarter, the fund firm wrote, Following a year with $119 billion of outflows from municipal funds and ETFs, we expect the tide to turn. For high-income taxable investors, we are expecting a municipal bond renaissance. According to the report, muni bonds only offered yields of around 1% at the start of 2022, compared to yields that now exceed 3% before adjusting for tax benefits. Tax-equivalent yields are at 6% or even meaningfully higher for residents in high-tax states who invest in corresponding state funds. Vanguard said that this makes munis a great value compared with other fixed income sectors and potentially even equitiesespecially with the odds of a recession increasing. According to the Vanguard report, muni bonds also remain strong from a credit perspective, with attractive spreads over comparable U.S. Treasurys and corporate debt. In fact, municipal balance sheets are stronger now than theyve been in two decades, leaving states well-prepared to navigate an economic slowdown.