Muni bonds draw investors amid market downturn

Municipal bonds remain a low-risk asset for investors seeking a safe haven from the sudden stock market turmoil triggered by President Trump’s tariff plans. 

Yield on 10-year AAA-rated municipal bonds dropped from 3.21% on Wednesday to 3.09% on Friday, according to the Wall Street Journal. Their yield decline came amid increased investor demand, as the S&P municipal bond index jumped nearly 1% last week following the tariff announcement. 

“Certainly during periods of volatility, bonds are comforting and you've seen that as interest rates have dropped a little bit here, bonds have gone up in value,” said William Connor, partner at the New Jersey-headquartered Sax Wealth Advisors, an RIA with $3 billion AUM. “Especially for high-net-worth individuals, they're a phenomenal place to have your portfolio.” 

Muni bonds are normally seen as a safe option to store cash during times of economic volatility, as the state and local government debt is backed by taxes or consistent revenue sources like utility income. Income generated from municipal bonds are generally exempt from federal taxes and residents who purchase bonds from their own state also avoid state taxes.

“Especially when you're in a high income tax state like a New York City resident would have, just being exempt from New York City tax plus the state of New York adds a meaningful difference,” added Connor. “So certainly for folks in the northeast that’s always been a core part of what we've done from an asset allocation perspective.” 

Fidelity Investments launched two new municipal bond ETFs on Monday, while last week saw T Rowe Price debut three new municipal bond strategies as separately managed accounts (SMAs). The three SMAs each carry a $250,000 minimum initial investment, one being for debt rated A- or higher, another BBB- or higher, and another that’s A- or higher that T Rowe Price is now offering to RIAs. 

“If you have clients who are looking for a state specific municipal bond strategy, we might be able to offer them some type of individual client personalizations,” said Michael Benedetto, head of SMAs at T. Rowe Price. “We now have 11 municipal bond strategies, and this brings us to around 35 or so SMAs in the market, which is nearly triple what we had about two years ago.” 

The tax-exemption status of municipal bonds has increasingly come under threat since Trump’s election win. Trump’s former advisor Stephen Moore recently called to end the muni tax break, which would help raise funds for the federal government to extend 2017 tax cuts.