Must-know: Working the municipal bond portfolio



So, what’s next? We think it’s time to protect those gains rather than reach for more. We also think it makes sense to prepare for more volatile interest rates than we’ve seen over the past several months, particularly as the Fed gets closer to abandoning the zero-interest-rate policy it put in place in December 2008. More precisely, we’d suggest three actions to consider now:

1. Flex more muni muscle with a flexible municipal fund. “Unconstrained” investing has gotten quite a bit of press this year. My colleague Rick Rieder wrote about it, and BlackRock recently published a new paper on the topic. It’s a concept that’s just taking hold in the muni space, and we think it makes a lot of sense. Essentially, an unconstrained municipal strategy, such as our own Strategic Municipal Opportunities Fund, is a flexible, one-stop solution that invests across the entire municipal spectrum. It’s not limited to bonds of a particular credit quality or maturity date. Importantly, we are able to manage interest rate risk by adjusting our duration as needed in an effort to mitigate the losses that accompany a rise in interest rates. It’s a kind of flexibility not previously available, and we think it can add a lot of diversification to your muni allocation at a time when market uncertainty demands a high level of adaptability.

flexible muni bond, MUB

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Market Realist – The graph above shows the returns from the BlackRock Strategic Municipal Opportunities Fund (MAMTX), which is a flexible fund following unconstrained investing, and the iShares National AMT-free Muni bond ETF (MUB). The flexible portfolio of MAMTX has helped give higher returns to investors than MUB, which tracks a broad muni-bond market index. Municipal bonds have outperformed U.S. Treasuries (TLT)(IEF), corporate bonds (LQD), and high yield (HYG) and junk (JNK) bonds this year. A flexible portfolio helps shore up incomes even further.

Read on to the next part of this series to find out how working the barbell can benefit investors.


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