Municipal bond funds could also be having their second within the solar after a tough begin to the yr for fastened earnings. According to Strategas Research, the iShares National Muni Bond ETF (MUB) noticed the second highest inflows within the second quarter amongst U.S. ETFs at $5.4 billion. That was behind solely the SPDR Bloomberg 1-3 month T-bill ETF (BIL) , which tracks short-term Treasuries. That has continued within the early days of the third quarter, with the iShares fund choosing up one other $106.7 million of inflows final week, based on FactSet. Inflows are usually not an ideal measure of investor demand, however the total pattern appears to be towards extra conservative areas like municipal bonds, based on Strategas strategist Todd Sohn. “Sector flows skewed decisively defensive with Healthcare and Staples scoring the largest inflows (roughly +$15 Bn combined), while economically sensitive Financials and Discretionary saw sharp outflows (-$20 combined). … The surge in cash-like bond flows echoes this, with the category collecting a massive +$32 Bn in 1H. Higher short-term rates are an additional boost,” Sohn wrote. The renewed curiosity within the fund got here after a tough begin to the yr. Bond costs transfer inversely to yields, which spiked within the first half because the Federal Reserve started to reverse its pandemic-era insurance policies. The iShares National Muni Bond ETF is down greater than 8% yr to this point. The Vanguard Tax-Exempt Bond Index Fund ETF (VTEB) , which has added greater than $1 billion of inflows over the previous month, is equally down 8.6% for the yr. “It did feel as though at times in the first half of the year that there was forced selling happening in certain parts of the credit markets, and I would say that municipals … were one of the sectors that just seemed as though there was a pretty relentless amount of selling,” stated Mark Heppenstall, chief funding officer at Penn Mutual Asset Management. A extra upbeat second half? There are some causes to assume that the second half of the yr might be higher for municipals. For one factor, the 10-year Treasury yield is now effectively beneath its highs of the yr, even after some massive intraday jumps late final week. “Rising interest rates should also pose less of a headwind to performance because we believe the bulk of the move up in yields this year is likely behind us,” Cooper Howard, a hard and fast earnings strategist at Charles Schwab, stated in a word. Municipal bonds could also be unlikely to see massive positive factors in worth that may be present in belongings like development shares, however their tax benefits versus non-public debt will help increase the payouts for income-hungry traders. The curiosity paid on municipal bonds by governments will not be topic to federal earnings tax. The iShares fund’s payout over the previous 12 months has been about 1.9%, but it surely has had bigger payouts in periods when rates of interest have been larger. As new bond issuances are added to the fund’s portfolio, the payout might rise. As yields have jumped this yr, and issues about an financial slowdown have widened spreads, prime quality debt that’s barely riskier than Treasurys might be a candy spot for traders. “The municipal side and the high-quality corporate side would both be more attractive at this point than Treasurys,” Heppenstall stated. That is very true for longer-term bonds, based on Schwab’s Howard. “Longer-term munis are more attractive than short-term munis. Yields relative to Treasuries are more attractive for longer-term munis compared to short-term munis,” Howard stated. The two important ETFs provide comparatively low-cost and easy methods to get publicity to the market. The iShares fund and the Vanguard fund, which pay out on a month-to-month foundation, have expense ratios of lower than 0.1%. There are a number of different municipal bond ETFs with vital belongings, together with choices from Nuveen and Invesco.