Just counting the effects of the federal tax exemption, if you’re in the 24 percent federal tax bracket, the 1.4 percent current yield on the Vanguard Intermediate-Term Tax-Exempt fund is equivalent to a yield of 1.84 percent in a taxable bond fund (assuming, of course, that neither is held in a tax-sheltered account). For investors in the 35 percent federal tax bracket, the yield is the equivalent to a taxable yield of 2.2 percent The average current yield for core bond funds (whose income is taxable) is 1.4 percent.
If that yield advantage appeals, it bears repeating that the coming months may be rocky.
Mr. Hayes cautioned that even with a reopening of the economy, municipal revenues will “only be at a percentage of what they were pre-Covid.” Even if a vaccine arrives, people may not spend as much, rely on public transportation with the same gusto, or drive or fly as much, or flock to stadiums, arenas and convention centers.
Moreover, some states and cities that issued high volumes of bonds already had severe budget problems before the crisis: Illinois and New Jersey had many bonds rated BBB, the lowest rung of investment grade before the coronavirus. These and other states may find it harder to dig out of this recession.
As downgrades emerge, Mr. Hayes says “headline risk” may shake up the market. When one issuer falters, he said, “investors begin to worry about the overall health of the market, and it becomes a contagion and there is a sell-off.”
But remember that after such sell-offs in the past (see: Puerto Rico, Detroit), there was no lasting impact on the broader market. “Those usually end up being good long- term buying opportunities,” said Mr. Hayes.
There is already opportunity to find value despite the headlines, many managers say.
Mr. Kiselak at Vanguard says that while nursing homes may face a rough road because of coronavirus-related deaths, another type of institution, known as continuing care retirement communities, have not had such problems, but their bonds have been hammered as if they did.
He said the Vanguard municipal bond team is also finding value in the bonds of single-site health care centers that do not have the same challenges as “massive systems that were in epicenters,” where coronavirus costs rose and revenue fell as nonessential procedures were closed.