Municipal bonds fell 6.35% in the third quarter of 2023, their worst quarter since 1981, driven by rising interest rates rather than deteriorating credit conditions. The yield on the Bloomberg Municipal Bond Index reached 4.78% in early October, making the market particularly attractive for high-income investors seeking tax-free income. Closed-end funds can distribute substantial monthly tax-exempt income, but their share prices may be volatile and their use of leverage can magnify losses. For investors seeking simplicity, municipal bond ladders and ETFs offer diversification options, although duration risk remains a consideration; Vanguard’s Core Tax-Exempt Bond ETF has a 30-day SEC yield of 4.49% and an average duration of 7.5 years.
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