Through the special vehicles with credit guarantees from the Treasury, the Federal Reserve is making massive buys of US corporate and municipal bonds. It’s doing this to both stabilize the bond and credit markets now, as well as working to drive down yields and credit costs for corporations, municipalities and other debt issuers.
This means both segments and others have a major buyer that underpins prices. Just like after 2007-2008, the Fed kept the bond portfolio and reinvested maturities and interest for most of the following decade. And recently, the new and renewed buying is bulging the Fed’s portfolio to nearly $7 trillion and climbing.
Federal Reserve Assets—Source: Federal Reserve & Bloomberg Finance, L.P.
The past has shown how corporates and munis profit with Fed actions. From the end of 2008 through the end of 2019, corporate and municipal bonds generated returns of 103.6% and 72.7%, respectively.
Municipal (White) & Corporate (Orange) Bond Indexes Total Return—Source: Bloomberg Finance, L.P. & Barclays
Both have impressive collections of US corporate bonds, with BlackRock actively managing the actual bonds, while Vanguard does it synthetically following the BlackRock & Barclays Index. And remember, BlackRock is under contract with the Fed to oversee bond buying.
Since late March, both have impressive performance, with VCIT at 9.34% and BTZ at 36.7%.
VCIT yields 3.32% and is a buy in a tax-free account.
BTZ is a closed-end fund and trades at a discount to net asset value (NAV) now of 6.9%, making for an even bigger bargain. Yielding 6.45%, BTZ is a buy in a tax-free account.
I also have a collection of municipal bond funds within the portfolios of Profitable Investing, including the BlackRock Municipal Income Trust II (NYSE:BLE), which is at a discount to NAV. It sports a taxable equivalent yield of around 8% and is a buy in a taxable account.
Another one of my favorite bond ETFs is the Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEARCA:TFI). It yields a taxable equivalent of around 3% and tracks the leading muni index. TFI is a buy in a taxable account.