“Last year we were more aggressive in what we call the mediocre middle,” he said. “This is an environment where there is no need to pursue something that you don’t love for the long run.”

Likewise, Vanguard is avoiding the lowest-quality bonds.

“Anything that we’re not touching is really the lowest quality. The stuff that gets done because there’s not a lot of yield elsewhere and you look at it and go ‘wow, everything has to go 100% right,’ those are the characteristics of what we’re avoiding,” Malloy said, detailing that they’re “not keen” on the more speculative project finance names.

Miller --  who oversees Nuveen’s $223 billion of state and local debt -- said he’s favoring “credit exposure” over pure interest rate risk.

“We are looking at couponing and other structural characteristics that can provide some cushion should rates continue to migrate higher,” he said. Additionally, the Chicago-based manager continues to be positive on major Illinois-based credits, like the City of Chicago and the state’s general obligation bonds. “There is still a little further to run there,” he said.

Miller runs the muni market’s largest high-yield fund, which returned 9.7% in 2021, besting the junk muni benchmark and 98% of peers over the last year, according to data compiled by Bloomberg. High-yield municipals returned almost 8% last year, outperforming the overall muni market by more than 6 percentage points. But, he said those kind of gains are unlikely a second year in a row. One-hundred to 200 basis points of outperformance “would be pretty good compensation for the risk of high yield just to moderate those expectations a bit this year.”

Both fund managers called the recent surge in coronavirus cases a “blip” and said they aren’t changing their portfolio positions because of the omicron variant.

“People, including myself, are trying to look at this as a short-term blip as far as economic impact,” Miller said.

It’s “nothing that changes our long-run fundamental view,” Malloy added.

This article was provided by Bloomberg News.

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