DJ Shaw
3 min read
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Despite a weekend downgrade of U.S. government debt by credit rating agency Moody's, municipal bonds remain insulated from federal credit concerns, say fixed-income experts at WisdomTree Inc. (WT).
In a Monday webinar titled "What to Expect in the Muni Markets as Fiscal Policy News Heats Up," Kevin Flanagan, head of fixed income strategy at WisdomTree, addressed investor concerns following a one-notch downgrade of U.S. credit by Moody's to AA1 from AAA.
"It was not unexpected. Matter of fact, it was widely expected," Flanagan explained during the session, noting the U.S. had already lost its AAA rating in August 2023 when Fitch downgraded it to match S&P's AA+ rating.
While Treasury markets briefly reacted to the downgrade news, municipal bond investors can take comfort that current budget negotiations in Washington appear to leave tax advantages for muni investors intact, according to the WisdomTree experts who highlighted potential opportunities in an asset class the firm recently entered with two new actively managed ETFs.
"We got some good news last week that at least in this current version, there is not really anything that's on the table currently that would relate to reducing the ability for investors in municipal securities to see those potential tax benefits eroded," said Brad Krom, U.S. head of research at WisdomTree, during the webinar. "This is always the fear, I think, every time you start to get the government focusing on different ways that they can raise revenue."
The discussion comes just weeks after WisdomTree launched the WisdomTree Core Laddered Municipal Fund (WTMU) and WisdomTree High Income Laddered Municipal Fund (WTMY) in early April, with expense ratios of 0.25% and 0.35%, respectively.
Unlike federal debt, municipal bonds remain attractive for their tax efficiency and credit quality, according to Flanagan. The new ETFs employ a laddered maturity strategy in partnership with Insight North America, which manages approximately $17 billion in municipal assets.
"What I love about our Muni funds is that they're not only laddered, a time-tested strategy, but it's also an active approach," Flanagan stated. "We have a dedicated Muni research team, not just a person or two trying to figure out how these credits fit in your portfolio."
WTMU focuses on core investment-grade municipal bonds with over 50% in revenue bonds, while WTMY takes a more opportunistic approach with over 50% in high-yield municipal securities, according to Krom's presentation.
