The fixed income landscape continues to offer real opportunity this year as well as persistent, events-driven uncertainty. Still, cutting through the headlines, investors can find major opportunities inside the portfolios and in adding new funds. American Century vice president and senior portfolio manager Joe Gotelli recently discussed shifts in the muni bonds market with VettaFi, including one particularly big opportunity.
Key Takeaways:
- The American Century Diversified Municipal Bond ETF (TAXF) provides an actively managed option to get muni bonds exposure.
- Amid strong demand, with some $63 billion in net inflows to muni bonds YTD, opportunities abound.
- Following a complicated July for total return, tax loss harvesting out of passive muni bond strategies to active may boost portfolios longer term.
Gotelli, who joined American Century Investments in 2008, explained that where early and mid-July saw “richness” at the tails of the muni bond curve, some of that has now leveled out. That resetting came from the move higher in yields amid sticky inflation and expectations of a more hawkish Fed
“Treasury yields moved higher, but municipal yields moved even further,” Gotelli said. “And so that pushed the ratios a touch wider. It really is creating a more attractive valuation backdrop.”
“We’ve really kind of seen that absolute yields are still attracting demand into the asset class,” he added. “And so the retail investor looking to increase their allocation to exempts is getting the opportunity to take, as they say, a second bite at the apple.”
Opportunities Abound in Muni Bonds
Demand, Gotelli said, has been strong this year for muni bonds. He pointed to some $63 billion in net inflows YTD as of early August. As for where risk may be mispriced by markets amid that interest, he said, may come from a surprising source – inaction.
Gotelli underlined that investors have a major opportunity to do what American Century Investments is doing in its portfolios: tax loss harvesting. The fixed income team there, he explained, is looking at the cost basis of its holdings following a difficult July for total return. That, he said, could underscore the importance of an active investing approach.
“The higher yields that an active product such as TAXF are offering (during) this backup in returns, with July being one of the worst return July’s going back 20 years. At 185 basis points negative return, this gives you the opportunity to tax loss swap some of your mutual fund, ETF, or individual bond holdings, recognize those losses and rebook at a higher level of income in today’s higher rate environment,” he said.
See more: As CPI Report Expectations Darken, Look to Value ETF Opportunities
Looking ahead, the biggest downside risk, he said, remains potential interest rate volatility in the face of geopolitical conflicts and less communication from the Fed. Per Gotelli, that shift in approach and the higher for longer signaling it has short term negative returns but longer term attractive exempt yields.
What’s in Store to Round Out 2026
Taken together, those factors speak to the firms’ approach to munis. The aim, he said, is to emphasize the level of rates and forward return opportunity over the generally tight risk premiums from dropping down in credit quality.
“We’re looking at opportunities for structural spread, and those are occurring in the sectors that we discussed such as multifamily housing and energy prepay sectors” Gotelli said. “We continue to be focused on the intermediate, call it 10-to-20 year portion of the yield curve, and we still think that is the most opportune portion of the curve.”
TAXF charges a 27 bps fee for its active approach to investment-grade and high yield muni bonds. For those looking to add tax exempt assets to their portfolios backed by American Century’s insights in the space, it stands out as a keen option to watch.
Originally posted on ETF Trends
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