BNY Mellon US Municipal Infrastructure Debt Fund: An Investment Investors May Consider in Turbulent Markets
U.S. municipal infrastructure bonds have long been popular with U.S. investors, in part because of the potential income stream they can offer.
Tighter monetary policy can pose a challenge for bond investors, as higher interest rates can make the interest paid by some bonds less attractive and drive down bond prices. However, based on historical data, despite increases in interest rates, municipal bond performance (including reinvestment of income) was able to generate positive returns most of the time.4. In addition, municipal bonds generated higher yields and were less exposed to volatility than comparable treasury bills.5.
Research shows that over rolling three-year periods, 10-year municipal bond yields have only posted 65%6 the volatility of 10-year Treasury bills.
US municipal bonds have always been considered a high quality asset class. Compared to corporate bonds, municipal infrastructure bonds are often issued by individual states, some of whose economies are large enough to compete with some sovereign states. For example, California’s GDP alone is equal to that of the United Kingdomseven.
Historically, the correlation of US municipal bonds with other major asset classes has been relatively low. Correlation is a measure of how the prices of two assets move relative to each other. The closer the coefficient is to 1, the more likely it is that the two increase and decrease in tandem.
From January 1997 to September 2021, the correlation between US municipal bonds and investment grade bonds was 0.68. During the same period, the correlation of US municipal bonds with US Treasuries was 0.52, while that of US municipal bonds with the S&P 500 index was only 0.02.8. A lower correlation can help investors mitigate volatility in their overall portfolio, especially during market turbulence.