BKMI targets the sweet spot of the municipal bond curve, focusing on intermediate-term maturities that historically offer better risk-adjusted returns than long bonds while yielding more than short-term munis. This positioning aims to capture most of the tax-free income benefit without the extreme rate sensitivity of longer-duration funds.
How It Works
The fund invests in investment-grade municipal bonds with maturities typically ranging from 3-10 years, maintaining a duration around 4-6 years. It diversifies across states and sectors (general obligation, revenue, pre-refunded bonds) while screening for credit quality. The portfolio rebalances monthly to maintain its intermediate duration target and replace maturing bonds, with active monitoring of credit downgrades that could force sales.
Key Features
- Tax-free income for investors in higher brackets, with yields typically 85-90% of comparable corporate bonds
- Lower volatility than long-term muni funds while capturing 70-80% of their yield advantage
- Broad geographic diversification reduces single-state budget risk that plagues state-specific muni funds
Risks
- Rising rates could knock 4-6% off NAV for each 1% rate increase given intermediate duration profile
- Municipal credit events, while rare, can cause 10-20% losses on affected positions before recovery
- Tax reform reducing top brackets would compress muni yield advantages, potentially causing 5-10% underperformance
Who Should Own This
Best suited for high-income earners in the 32%+ tax brackets who want steady tax-free income without the wild swings of long-term bond funds. Works well as a core fixed-income holding for taxable accounts, typically 20-40% of the bond allocation for investors seeking to minimize their tax bill while maintaining moderate interest rate exposure. Not worth the complexity for investors in lower tax brackets or tax-deferred accounts.