After the first rate cut of 2025 and the prospect of more rate cuts to come, the capital markets are now wondering at what pace the U.S. Federal Reserve will institute them. For fixed income investors looking for options that balance credit quality and yield, municipal bonds should be considered.
In recent years, short-term bond funds have been the go-to option for a balance of yield that also mitigates rate risk with rising rates and inflation. Fixed income investors accustomed to the elevated yields now may need to step further out on the yield curve to supplant income lost from falling rates.
Rather than step too far out on the yield curve, intermediate bonds offer a Goldilocks option to extract more yield, while still mitigating rate risk. Corporate bonds are another option for higher yields, but investors may not want to assume the associated higher credit risk. This is where municipal bonds with intermediate-term maturities can assist.
The municipal bond market is vast and nuanced, requiring a certain level of experience and expertise to navigate the space. Rather than construct a portfolio of individual munis, an easier approach is via ETFs, specifically the MFS Active Intermediate Muni Bond ETF (MFSM).
Per the fund’s fact sheet, investors get a plethora of muni exposure across various industries, including student loan munis, general obligation bonds for financing local projects, and bonds supporting universities and colleges. Given this broad exposure, MFSM isn’t lacking in variety. This helps avoid concentration risk by avoiding only sector-specific bonds. The fund mostly sticks to investment-grade (rated BBB or higher) by credit rating agencies, mitigating credit risk.
Furthermore, it highlights the benefits offered by the fund’s actively managed strategy.
