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Why I Still Like Munis But Recently Made Some Portfolio Adjustments

Apr. 07, 2021 12:50 AM ETBBN, MHD, MUS, NEA, NIQ9 Comments


  • After growing cautious on municipal bonds at the beginning of the year, there are reasons to be more optimistic going forward.
  • The recent stimulus bill limits the credit risk, especially for investment grade munis, with a lot of support going to state and local governments.
  • Monthly flows into muni funds remain positive, illustrating this is still a sector that is in favor.
  • While credit risk is muted, interest rate risk is a major concern. With many muni funds having high duration levels, I made a swap into the lower duration alternative.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

Main Thesis/Background

The purpose of this article is to discuss the broader municipal bond market, with a specific focus on some adjustments I made to my portfolio. This is a follow-up to my review a few months ago, when I highlighted some of the major risks facing the sector. As a long-time holder of muni bonds, I have promoted this investment theme for a long time, but saw some heightened risks as 2021 got underway. These included slower than expected state/local economic recoveries, credit risk if stimulus aid fell short, and a heightened level of interest rate risk as treasury yields started rising.

Fast forward to today, and we seem to be in a better place. This makes me confident that this sector continues to have a place in my portfolio, and I will likely add at a moderated pace in the months ahead. The key reasons behind this outlook is that the economic recovery in the U.S. is progressing fairly well, and a recent stimulus bill out of Washington provides a high level of support to state and local governments. This eases short-term credit risk, in my view.

However, with treasury yields continuing to rise, interest rate risk remains high. Investors should focus on this attribute because many muni ETFs and CEFs have fairly high durations. While not necessarily unique to munis, as corporate bonds face a similar risk profile, this reality will limit the returns to muni bonds all the same. With this in mind, I made some portfolio adjustments that I wanted to discuss, which I believe allows me to capitalize on the positives of munis, while also limiting some of that duration risk.

Primary Change - Swapping MUS/MHD for NIQ

As I alluded to above, my primary focus right now is limiting interest rate risk. The rationale is

Please consider the CEF/ETF Income Lab

This article was written by

Dividend Seeker profile picture
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

I've been in the Financial Services sector since 2008, which unsurprisingly gives me an invaluable insight in how markets can turn. I was a D1 athlete in college (men's tennis), where I studied Finance. I also have my MBA in Finance.

My readers/followers can trust that I won't pump any investment nor discuss a topic I don't genuinely follow and research. In that spirit, I list my portfolio here for transparency

Broad market: VOO; QQQ; DIA, RSP



Dividends: DGRO; SDY, SCHD

Municipals/Debt Funds: NEA, PML, PDO, BBN


Cash position: 30%

Analyst’s Disclosure: I am/we are long NEA, NIQ, BBN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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