The Invesco Municipal Trust (VKQ) provides tax-free income for conservative investors, with a diversified portfolio consisting of 620 different muni bonds, explains Todd Shaver, editor of Bull Market Report.
None of its bond holdings have exposure greater than 0.8% of the fund, it is almost akin to T-bills when it comes to risk, but with a higher yield. This makes the fund perfect for retirees, and for a brief window of opportunity right now, for investors looking for growth.
As we’ve discussed several times in the past, muni bonds have had a rough couple of months starting in mid-2022, with the rising federal interest rates taking the sheen off them. After two full years of net outflows, $140 billion in 2022, and $8 billion in 2023, many funds, including this fund, trade at attractive discounts to their book value, and this is where the opportunity lies in the short term.
The Fed has already made it clear that its hawkish stance is over for the time being, and now even if there are no further rate cuts this year as inflation is already wearing thin and economic growth remains robust, the fund can still deliver outsized returns by capitalizing on new higher-yielding debt. If interest rates stay higher for longer, it bodes well for longer-term investors who stand to gain attractive total returns.
In addition to this, certain technical imbalances favor muni bonds. With $350 to $450 billion in fresh supply expected this year, and $400 billion in net maturities, demand will exceed supply. This, coupled with declining short-term rates will result in other bonds being called early, further escalating the supply and demand dynamics, which ultimately bodes well for muni investors.
The fund has posted a stellar 21% rally since late 2023, in response to the shifting monetary gears by the Federal Reserve. Yet, it continues to trade at a 9% discount to book value, which is in addition to its enviable tax-free yield of 4.5%. It has an extensive 30-plus year track record of ceaseless quarterly distributions and value creation while being spearheaded by an illustrious and well-regarded management team.
