Why Advisors Are Doubling Down on Munis, High-Quality Bonds Right Now

It’s evident from the market jitters since the start of war with Iran that there’s no real incentive to reach for yield right now in fixed income.

As the second quarter nears, financial advisors still have plenty of chances to build higher-quality portfolios using fixed-income investments, as starting yields in many sectors provide opportunities to curb volatility without sacrificing returns. And advisors should expect that volatility to continue. Even before the Iran war, both stock and bond markets were in flux; tech dips prompted by worries that artificial intelligence would undermine sectors such as software is just one example. With a new Federal Reserve chairman expected this spring and mid-term elections near the end of 2026, stability is likely to prove elusive, said Sam Miller, executive vice president of investment strategy at Signature Estate and Investment Advisors.

So far the US economic outlook remains firm, supported by an expected surge in capital spending under the One Big Beautiful Bill Act, and continued consumer buying, said Matt Wrzesniewsky, head of fixed income client portfolio management at Vanguard. But, the recent surge in energy prices from attacks by the US and Israel on Iran remains a wild card for the economy. Joseph Brusuelas, chief economist at RSM, said if oil prices hit $125 a barrel, it could have a broad, negative impact on growth, inflation, unemployment and the continuation of the business cycle.

“At that level, it would extract a drag of between 80 and 100 basis points on gross domestic product and an increase of 160 basis points in inflation from 2.4% to 4% in the consumer price index,” he wrote in a post.

Still, there are opportunities outside the US as diverging global monetary policy gives advisors chances to diversify fixed income holdings. In BlackRock’s recent Fixed Income Outlook, the asset manager urged investors to consider a broad range of options when building portfolios because starting yields are “unusually attractive” in the US as well as in Europe and Japan. Steve Laipply, global co-head of iShares fixed income exchange-traded funds at BlackRock, said fixed-income flows so far this year are ahead of the rolling 12-month basis across sectors, most notably in US Treasurys. It’s the same throughout  the industry, as global fixed-income ETF flows in February were about $65 billion, far ahead of the 12-month rolling average of about $56 billion. “Investors recognize that the opportunities in fixed income are still incredibly strong,” Laipply said.

Do You Take Cash? 

There’s also still $7.8 trillion sitting in money-market funds, according to the Investment Company Institute. For advisors looking to put cash to work, low-hanging fruit includes moving out further on the yield curve, which is likely to steepen, said Wrzesniewsky. He acknowledges it may be hard to move clients out of cash, but now is the time. “Ultimately, the environment here is that cash is probably going to underperform longer-term fixed income,” he said.

BlackRock notes that in 2025, the Bloomberg US Aggregate Index’s 7.3% return beat the 4.3% return of cash, the first time since 2020 that fixed income significantly outperformed. Wrzesniewsky said Vanguard has a slightly overweight position on credit, but selectively, as the spread between most investment-grade credit and Treasurys is likely to stay in a tight range between 70 and 90 basis points for the first half of the year. There’s potential for spread compression in some areas, however, such as collateralized mortgage obligations and non-agency mortgages.

Edison Byzyka, chief investment officer of Credent Wealth Management, is unimpressed with current investment-grade credit spreads and is mostly sticking with shorter-dated US Treasurys until spreads widen. He’s also not convinced that US rates will fall as much as some traders think, so he’s buying floating-rate funds to “play the narrative against the continuation of interest-rate cut expectations.” 

SEIA’s Miller expects the Fed to cut rates one or two times, but he’s hedging that conviction and is also overweighting bank loans, collecting the strong “seven-plus percent range with really little duration risk,” he said.

Muni-pulate the Market. Municipal bonds continue to prove their worth, with munis dated beyond 10 years having absolute returns around 2%, above taxable investment-grade bond returns of 1.4% as of late February, Wrzesniewsky said. Going out further on muni-bond yield curve makes sense as a steepening curve allows advisors to lock in yields and benefit from roll-down, he adds. “That yield story is a really powerful one, and that yield-curve steepness story is really important,” he said.

Miller agrees, although he is using taxable munis, rather than the tax-exempt ones to get higher yields. He is building ladders and is looking to take advantage of a steepening yield curve. 

Foreign Exchange Programs. Both BlackRock and Vanguard see dispersion as another positive fixed-income theme for active managers. “I would argue it’s a bit of a bond-picker’s market,” Wrzesniewsky said, with relative value plays one way to think about international investing, such as looking at US yields versus Europe or Japan. “A lot of it is trying to kind of squeeze out an extra couple of basis points, in a risk-aware way throughout the cycle,” he said.

Vanguard believes Japan’s curve will flatten as the country is expected to be a large debt issuer, while Europe’s curve could steepen, he added. Within Europe, there are relative value opportunities, too, with parts of peripheral Europe, such as Greece, doing better than France, which is a shift from several years ago when the Euro debt crisis threatened peripheral European countries. 

When putting new money to work in international fixed income, Byzyka said, he is underwriting structured notes tied to various international index-based ETFs. It’s a less risky way to get exposure than buying the index outright, he added. For example, he buys a structured note tied to an ETF for a duration of 12 months and applies a 5% to 7% downside buffer for the first 5% or 7% of losses in the trade. “We essentially capture the upside of that ETF during that timeframe. We’re trying to eliminate as much downside, even if we’re wrong in that active call, by underwriting the structured note directly,” he said “It’s been a very, very effective risk strategy for us,” he said.