Municipal bonds are a great way for investors to grab some tax-advantaged income, they’ll just have to be nimble, according to BlackRock. The income earned on muni bonds are free of federal taxes, so the assets are typically favored by wealthy investors. In addition, if the investor resides in the state where the bond is issued, they may also avoid state taxes. Taxable equivalent yields on munis, which is what the pretax yield a taxable bond would have to generate to match that of a tax-free muni bond, reach over 6%, explained Sean Carney, head of municipal strategy at BlackRock and chief investment officer of the firm’s municipal bond funds. “Municipal bonds offer investors high after-tax income with less volatility compared to other fixed income assets and remain a good diversifier to equity and equity-like risk,” Carney said. In a May note, BlackRock said value was being restored to the sector after the market had gotten ahead of itself in late 2023. In June, munis started to tick back up, with the the S & P Municipal Bond Index seeing a total return of 1.8% month to date, bringing the total return to 0.37% year to date. Issuance has also remained robust, the firm said. “There are opportunities,” Carney said. “You just need to be more nimble.” The firm has an up-in-quality bias in its portfolio. “That increases the liquidity profile, which is a nice option going into a period of increased unknowns,” he said, pointing to the elections, upcoming Federal Reserve meetings and growing government deficits. Carney prefers single-A rated credit in the primary market, which is initial issuances, although he also thinks AA also presents a good opportunity. When it comes to duration, the firm is neutral, which means it aims to match the duration of the benchmark. The S & P Municipal Bond Index has a modified duration of 5.95 years. That said, BlackRock started to selectively add duration in May, finding the 13- to 15-year part of the curve interesting. It comes down to investor preference on duration and credit quality, Carney said. For instance, he also sees some opportunities in the high-yield space. “Depending on what investors are looking for, there is good income to be had,” he said. “State and local governments are in very sound shape. Upgrades are outpacing downgrades.” Where BlackRock sees opportunity Within muni bonds, BlackRock specifically likes focusing on states that primarily rely on consumption taxes. States that don’t have an income tax and instead favored sales tax, like Florida, Nevada, Tennessee and Washington, all experienced positive revenue growth last year, Carney said. “Markets that are relying on consumers to come in and open their wallets to consume are doing very well,” he said. Those states that focused on personal income taxes, like California and New York, experienced much greater declines, he said. Carney also likes flagship universities, because they have name recognition and tend to have a large donor base. “Those tend to do very well, even when you hit blocks of weakness,” he said. “They don’t have volatility in enrollments.” Lastly, essential revenue bonds tend to be more durable since they are drawing on revenue. “They just have steady streams of income. You don’t see volatility in credit ratings at all,” Carney said. “We are long-term investors. We tend to favor things that have credit ratings that are going to be rather benign.”