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  • Writer's pictureRealFacts Editorial Team

Rising Interest in Municipal Bonds: A Lucrative Opportunity for Wealthy Investors Amid Potential Rate Cuts

municipal bond

Municipal bonds have caught the eye of investors amidst speculation about future interest rate cuts, heightening the appeal of this income-generating asset class. High-net-worth individuals especially favor municipal bonds for their tax advantages, offering federal tax-exempt income along with potential state tax exemptions for local residents. As expectations grow for interest rate decreases by the Federal Reserve, municipal bonds stand to benefit from potential price appreciation, presenting an optimistic outlook for current investors. In CNBC’s article, “There’s more than one way to access this asset offering tax-free income. How to make the right choice” Darla Mercado quotes UBS municipal strategist Kathleen McNamara saying, “With rate cuts delayed rather than canceled, we believe that yields on quality municipal bonds look attractive at current levels, And there’s also potential for capital gains as the year progresses.”Kathleen's thoughts on current yields and high-quality municipal bonds being attractive is definitely something to look at. With taxable-equivalent yields exceeding 8% for certain investors, indicating a promising opportunity.

There are several ways for investors to enter the municipal bond market, each with its own factors to consider. Individual municipal bonds, usually sold in $5,000 increments, require a large initial investment and thorough research but offer steady returns if held to maturity. On the other hand, open-ended mutual funds and exchange-traded funds (ETFs) give access to a mix of bonds with different maturities and interest rates, often needing lower minimum investments. For example, Vanguard’s Intermediate-Term Tax-Exempt Fund (VWITX) requires a minimum investment of $3,000 and has a 30-day SEC yield of 3.46%, along with a low expense ratio. While mutual funds and ETFs provide diversification and liquidity, their prices can change and do not guarantee the return of principal.

Closed-end funds provide another way to invest in municipal bonds. These funds trade on exchanges with a fixed number of shares, often at prices below or above their net asset value. They use leverage to potentially increase returns but also bring more volatility. Currently, many municipal closed-end funds are trading at significant discounts, which could be beneficial if the Federal Reserve lowers interest rates. However, investors should be aware of higher expense ratios and the risks that come with leveraged investments. Jon Browne from RiverNorth suggests that if interest rate cuts happen and inflation stays low, longer-duration assets like municipal bonds could gain, highlighting the need for careful evaluation by investors.


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