The only part of the muni yield curve that has slightly underperformed is the short-end, said Foux. Investors should add short-dated bonds and hedge them with Treasuries, he said. Short-dated New Jersey general obligation and appropriation-backed bonds and Detroit Public School bonds are attractive as is zero-coupon debt.
In July and August, the strength of the $3.7 trillion market may continue as issuance declines and bondholders reinvest debt payments and proceeds from callable bonds. Nuveen Asset Management forecasts $48 billion will be reinvested in July and $44.5 billion in August, compared with issuance of $39 billion and $37 billion, respectively.
Since the beginning of the year, munis have returned 4.3 percent, or 6.2 percent on a tax-adjusted basis, according to Barclays. That’s better than the 5.4 percent return for Treasuries. The S&P 500 has gained about 2.7 percent.
“All those features in terms of tax exemption, the yield, and negative correlation to equities have attractive characteristics, so they keep putting money to work and that money is coming in globally as well,” said John Miller, co-head of fixed income in Chicago at Nuveen, which oversees $120 billion of munis.
After Brexit, the Fed likely won’t raise interest rates for the rest of the year, eliminating a risk to the value of outstanding fixed-income securities, Miller said.
Meanwhile, a victory by Democrat Hillary Clinton in the presidential election would also support municipal bonds because she would likely raise taxes, increasing the value of the tax exemption, said Foux. Conversely, a Trump victory would hurt.
“For the most part, I see the market being supported near term,” Foux said. “It’s a defensive asset class. It should perform well in times of stress.”