ETF 360: John Lawlor Unpacks the State of Munis

Municipal bonds, having experienced a significant sell-off to near 15-year lows in early 2025 due to legislative uncertainty, now present a compelling value opportunity with taxable equivalent yields potentially exceeding 8%. MacKay Shields highlights that beyond their traditional tax-exempt income, active management through credit research, curve positioning, and sector rotation can generate alpha and total return. The NYLI MacKay Muni Intermediate ETF (MMIT) exemplifies this by focusing on intermediate duration to mitigate interest rate volatility, positioning munis as a flexible component for diversification and attractive income in investor portfolios, particularly for those potentially underweight in the asset class.

Analysis

A significant sell-off in the municipal bond market at the start of 2025 has pushed prices to near 15-year lows, creating a notable value opportunity for investors. According to MacKay Shields, this underperformance relative to other fixed-income assets was driven by uncertainty surrounding new legislation and its potential impact on the tax-exempt status of munis. The resulting price compression has elevated taxable equivalent yields to levels reportedly exceeding 8% for the average investor, presenting a compelling relative value proposition. Beyond the traditional appeal of tax-exempt income, there is a strong case for active management to generate alpha through credit research, curve positioning, and sector rotation. The NYLI MacKay Muni Intermediate ETF (MMIT) exemplifies this approach, utilizing an intermediate duration strategy to mitigate interest rate volatility while capturing attractive income. This positioning is particularly relevant for investors who may be underweight fixed income, given the substantial run-up in equities over the past three years, making munis a potentially tactical tool for diversification and income.

Key Decisions for Investors

• Given that the recent sell-off has driven taxable equivalent yields above 8%, investors should evaluate municipal bonds as a compelling relative value opportunity within their fixed-income allocation.
• Consider actively managed strategies like the NYLI MacKay Muni Intermediate ETF (MMIT) to potentially generate alpha and total return, rather than viewing munis solely as a source of passive tax-exempt income.
• For investors concerned with interest rate risk, focusing on intermediate-duration municipal bond funds can provide a strategic balance of attractive income and reduced price volatility compared to longer-dated bonds.
• Investors with portfolios heavily weighted towards equities should assess their potential underweight to munis and consider reallocating to the asset class for diversification and income generation.