Muni Bonds Offer High Yields as Tax-Loss Harvesting Rises
Municipal bonds continue to offer significant opportunities for investors as yields reach multi-decade highs, according to American Century Investments Vice President and Senior Portfolio Manager Joe Gotelli. The combination of raised yields and tax-free income is helping to offset rising costs for investors.
Gotelli noted that the asset class has seen record-volume days in recent weeks, with both institutional accounts and retail investors extracting value through tax-loss-harvesting trades. “We’ve seen some record-volume days in the asset class,” he explained, highlighting the increased activity in the muni bond market. “Institutional accounts like ourselves, as well as retail, are extracting value in the market by executing tax-loss-harvesting trades.”
The recent “backup” in muni yields has created attractive valuations, drawing crossover investors into the market. This shift enables investors to pursue credit opportunities at higher yields without needing to reach for credit risk.
The primary risk remains rate-driven rather than credit-related, according to Gotelli. “I think for the market, [it’s] just a clear understanding that, even though we’ve had some headlines around certain credit events in our market, the negative total returns that we’re experiencing have been predominantly rate driven at this point,” he said.
To address rate risk, muni bond ETFs such as the American Century Diversified Municipal Bond ETF (TAXF) are gaining traction. The manager, who joined American Century in 2008, emphasized that the firm’s focus is now expanding beyond the belly of the yield curve to capture opportunities in other areas.
“Really our goal in the last couple of weeks has been to ensure that we’re improving the income distribution on all of our portfolios across the board in this more attractive yield environment,” he added. This diversification allows managers to employ more complex structures that add positive convexity to portfolios.
The firm’s strategy reflects a broader trend of increased retail attention to municipal bonds, driven by the appeal of tax-advantaged income. As yields climb, investors have more flexibility to select bonds that match their risk tolerance without sacrificing returns.
While some credit concerns have surfaced, overall market performance remains largely influenced by interest-rate movements. Gotelli’s outlook suggests that discretion will be needed in some areas as the market manages these factors.
