DMB Bonds: A Tax-Exempt Income Play in a Rising Rate World

In a landscape where rising interest rates and elevated inflation continue to test fixed-income investors, the BNY Mellon Municipal Bond Infrastructure Fund (DMB) emerges as a compelling, if nuanced, opportunity. This closed-end fund offers a rare combination of tax-exempt income, exposure to infrastructure-focused municipal bonds, and a yield advantage—though it comes with risks that demand careful scrutiny. Let's dissect its appeal and pitfalls in the context of today's markets.

The Tax-Exempt Advantage

DMB's primary draw lies in its federal tax exemption, a feature that becomes increasingly valuable as rates climb. The fund targets monthly distributions—currently yielding around 4.46%—that are free from federal income tax. For investors in high tax brackets or states without state income tax (e.g., Texas or Florida), this creates a clear edge over taxable bonds. Even in states with income taxes, DMB's focus on out-of-state infrastructure projects (e.g., toll roads, utilities) can reduce exposure to unfavorable state-specific levies.

Yield and Rate Risk: A Delicate Balance

The fund's yield advantage is amplified by its strategic tilt toward high-quality municipal bonds—99.99% of its holdings are investment-grade—with an average coupon of 5.01%. However, its effective duration of 4.39 years (down from 4.76 in 2024) means it remains moderately sensitive to rising rates. A 1% increase in rates could trim its net asset value (NAV) by ~4.4%, though this shorter duration reduces its volatility compared to longer-dated peers.

The fund's 30.96% leverage complicates the picture. While this amplifies returns during favorable conditions, it also magnifies losses during downturns. Investors must weigh this risk against DMB's persistent discount to NAV (averaging -12.89% in 2024), which partially offsets its rate sensitivity by offering shares at a bargain.

Credit Quality and Geographic Risks

DMB's infrastructure focus—investing in toll roads, public utilities, and healthcare facilities—provides a cash-flow advantage over general obligation bonds reliant on taxpayer funding. However, its geographic allocations raise flags. Top exposures include states like Illinois (6.07%) and California (5.89%), both rated near junk status (BBB- for Illinois). While infrastructure projects often have dedicated revenue streams, fiscal mismanagement or economic shocks in these regions could destabilize bonds.

Why DMB Shines in 2025

Despite these risks, DMB's 4.46% yield stands out in a market where 10-year Treasuries hover near 4.26%. The fund's income generation is bolstered by its high coupon portfolio, which reduces reliance on price appreciation. In a prolonged rate environment, this “yield cushion” becomes critical, as bonds with higher starting yields are less vulnerable to further hikes.

The Trade-Offs

• Expense Ratio: At 3.52%, DMB's fees are nearly double the average municipal bond fund. This eats into long-term returns and diminishes its tax-exempt edge.
• Leverage and Volatility: While leverage enhances distributions (currently $0.0380/month), it also exposes investors to heightened NAV swings.
• Discount to NAV: A widening discount (peaking at -15.34%) reflects skepticism about DMB's complex structure and macro risks.

The Bottom Line

DMB is a high-reward, high-risk play for tax-sensitive investors willing to tolerate volatility. Its yield and infrastructure focus make it a viable option for those prioritizing federal tax exemption and income resilience in a rising-rate world. However, its elevated costs, geographic concentrations, and leverage require caution.

Investment Strategy

• Buy: For high-income investors in low-tax states seeking steady tax-free income, provided they can stomach rate-driven volatility.
• Avoid: If you prioritize capital preservation, have a low risk tolerance, or prefer lower-cost alternatives.

Alternatives to Consider

• Shorter-Duration Funds: The iShares National Muni Bond ETF (MUB) offers lower duration (4.5 years) and a 1.42% expense ratio, sacrificing yield for stability.
• State-Specific Funds: For investors in states with strong credit profiles, regional muni funds may offer better risk-adjusted returns.

Final Take

DMB is not a “set it and forget it” investment. Its success hinges on stable interest rates, favorable credit conditions in key states, and a narrowing NAV discount. For the right investor—those with a long time horizon and a need for tax-free income—it could be a valuable piece of a diversified fixed-income portfolio.