Municipal bonds may be exempt from taxes, but they’re not exempt from the hit being laid on bond markets. That pressure stems from roaring inflation and the beginning of the Federal Reserve’s interest-rate hikes.
Consumer prices surged 8.5% in the 12 months through March. And the Fed executed its first rate increase that same month--25 basis points. Many economists and investors expect a 50 basis-point hike in May.
As for munis, the Bloomberg Municipal Bond Total Return Index has slid 7.3% so far this year.
If you’re looking to buy munis, you may want to wait for more Fed rate increases. That’s because if those rate increases come, as expected, muni bond prices will almost certainly fall further.
But here are three muni mutual funds to consider when you think the time is right. All three received Morningstar’s top rating of gold.
1. Vanguard Intermediate-Term Tax-Exempt Fund VWITX.
It’s “managed by diligent leaders through a sensible and risk-conscious investment process and benefits from ultra-low fees,” Morningstar analyst Elizabeth Foos wrote in a commentary. The fund’s expense ratio is 0.17%.
“Rather than making outsize bets on individual names, [the] team focuses on thoughtful structural trades along the municipal yield curve and relative value discussions across broad sectors of the market,” she said.
“The team’s strict emphasis on the higher end of the credit-quality spectrum as well as a relatively moderate duration profile can cause the strategy to lag during exuberant markets, but these features have also kept the strategy out of trouble in the toughest stretches for muni bonds.”
2. T. Rowe Price Tax-Free High Yield PRFHX.
It benefits from “thorough bottom-up research, rational and repeatable portfolio construction, and robust analytical tools,” Foos said.
Fund manager Jim Murphy “aims to strike a balance between the cautious and aggressive players in the high-yield muni Morningstar category,” she said.
“He treads lightly in leveraged structures and the muni market's riskiest areas, which means that the fund won't necessarily outperform when credit rallies, as was the case from most of 2015 through 2019.”
On the other hand, though, “it has held up well during bumpy muni markets, such as 2020’s first-quarter market sell-off,” Foos said.
Over the long term, Murphy's approach helped curb the muni market's worst volatility while providing attractive returns.”
3. Fidelity Tax-Free Bond FTABX.
Foos praises the fund’s “consistent strategy, distinctive approach and attractive price tag.” Its expense ratio is 0.25%.
The management team seeks to identify mispriced bonds in the muni market.
“The group analyzes bonds from many angles, focusing on credit quality and structural traits such as coupons and call features and dislocations along the maturity curve,” Foos said.
“This strategy steers clear of leveraged structures and large stakes in troubled names and non-rated bonds, as well as bonds subject to the Alternative Minimum Tax.”
"Strong security selection, particularly in healthcare and transportation, and a focus on mid- and high-quality bonds over the past decade have provided protection when muni markets get rocky,” Foos said.
