With the Federal Reserve rate-cutting cycle expected to begin and the November election just around the corner, now could be a good time to invest in municipal bonds. For one, they are a way to lock in yield as interest rates fall. "Municipals are a great way to do that, given the tax-exempt nature, and given that a lot of municipals are longer maturity and longer duration," said Matthew Norton, chief investment officer for municipal bonds at AllianceBernstein.
Duration is a measurement of a bond's price sensitivity to fluctuations in rates, and longer-dated issues tend to have greater duration. "Once we see that first Fed cut , and we see money coming out of cash, we do see an environment where municipals could meaningfully outperform," Norton added. Interest earned on municipal bonds are free from federal tax.
They may also be exempt from state taxes if the investor resides in the issuing state. On top of that, issuers have been adding more supply to the market, but that is expected to slow by Election Day, at least in the primary market, said Dan Close, head of municipals at Nuveen. "Buying now, when there's a lot of paper and it's cheaper, we think presents an opportunity," he said.
Plus, "once we have the new issue calendar grind, if not to a halt, at least to meaningfully less paper during and immediately after the election, that presents an opportunity because you're not competing with the primary market." The election is bringing a lot of uncertainty about what will h.