Why not buy municipal bonds?
Just as with every coin that has two sides, municipal bonds also come with a variety of risks despite their steady returns and tax advantages. There is potential for loss with municipal bonds if the issuer defaults, interest rates rise dramatically, inflation spikes or if the bond is called early.
What are the disadvantages of municipal bonds?
Municipal bonds, like all bonds, pose interest rate risk. The longer the term of the bond, the greater the risk. If interest rates rise during the term of your bond, you're losing out on a better rate. This will also cause the bond you are holding to decline in value.
At what income level do municipal bonds make sense?
If you sit in the 35% income tax bracket and live in a state with relatively high income tax rates, then investing in municipal bonds (munis, for short) will likely be a better option than taxable bonds. Alternatively, if your income is in the 12% tax bracket, then you may want to steer clear of municipal bonds.
What are the risks of municipal bond funds?
Interest rate risk.
U.S. interest rates have been low for some time. If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower market value of the bond.
Are municipal bonds a good investment for retirees?
It's a good idea to shift over to bonds to some degree in retirement because they offer the benefit of predictable interest income. They also tend to be a lot less volatile than stocks. And you need investments that are generally more stable at a time when you're actually looking at selling off assets for income.
Are municipal bonds safe in a recession?
Stability in periods of crisis
In fact, compared to other bond markets, the credit-quality ratings of the municipal sector have been very stable, not only during the COVID-19 crisis but also during the Great Recession of 2008 and other previous economic downturns.
Should you buy municipal bonds now?
Because yields have recently improved among municipal bonds, investors no longer have to stretch for competitive income from lower-quality investments. And if valuations among municipals snap back as they have in the previous three decades, investors' source for competitive, total returns may also be closer to home.
Are municipal bonds a good investment in 2024?
In 2024, there is promising opportunity for positive performance. The expectation is that more cash from these outflows will return to tax-exempt bonds, presenting opportunities for investors as market conditions improve.
Who benefits most from municipal bonds?
If purchased by a taxpayer in the issuer's state, they're often exempt from state income taxes, too. As a result of the tax benefits, they may be an attractive option for high-income earners looking for a relatively stable income source. Bonds issued by states account for about 13% of the muni market.
How do municipal bonds do in a recession?
The main takeaway is: municipal bond downgrades are a common occurrence during recessionary times. Defaults attract a lot of attention, but they tend to be more the result of idiosyncratic circ*mstances and/or events.
What is the safest type of municipal bond?
General obligation (or GO) bonds are issued by state and local governments and are backed by the full faith and credit of the issuer, which in turn uses its taxing authority — that is, collection of income, property and sales tax — to repay the bond obligation.
What kind of account should never hold a municipal bond?
Although municipal bonds may not be totally tax-free, we generally don't suggest investors hold them in tax-advantaged accounts, like IRAs, because the interest income they pay is generally exempt from federal income taxes.
How do I avoid taxes on municipal bonds?
Municipal bonds ETFs are generally free from federal and state taxes if they hold only tax-exempt bonds. However, if the municipal bond ETF has a combination of tax-free and taxable interest, taxes may be due on the federal and state level.
How much of my portfolio should be in municipal bonds?
For investors who can benefit from tax-exempt income, a fixed-income-only portfolio should contain a substantial allocation to municipal bonds. We favor 25% or more.
Can you lose principal with municipal bonds?
When an investor sells a municipal bond, there are potential financial consequences that should be taken into consideration. These include: Potential Loss on Principal — The market value of a municipal bond is governed by a number of factors, including those described above.
Why are my municipal bonds losing money?
Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up. Inflation can also erode the returns on bonds, as well as taxes or regulatory changes.
What happens to bonds when stock market crashes?
Even if the stock market crashes, you aren't likely to see your bond investments take large hits. However, businesses that have been hard hit by the crash may have a difficult time repaying their bonds.
Where is the safest place to put your money during a recession?
Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.
What is the outlook for municipal bonds in 2024?
We believe the municipal market is poised for improvement in 2024. The Fed's anticipated easing this year should bolster demand for municipal bonds. If investor sentiment shifts positively, as we expect, strengthening demand could absorb secondary market supply and act as a catalyst for spread tightening.
What happens to municipal bonds when interest rates drop?
Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
Why do people buy municipal bonds?
Municipal bonds help finance projects such as roads, schools and other public works efforts. Even though they don't typically post large returns, tax-free municipal bonds may be valuable to some investors.
Are municipal bonds a smart investment?
Investing in municipal bonds is a good way to preserve capital while generating interest. Municipal bonds hold several tax advantages over corporate bonds.
Are municipal bonds exempt from federal taxes?
A major benefit of municipal bonds, or "munis," is that the interest they pay is generally exempt from federal income taxes. They're also generally exempt from state income taxes if the issuer is from the investor's home state.
Why invest in munis now?
Municipal bonds can be an attractive investment option for higher income earners given their tax benefits and generally high credit quality. We suggest extending duration and locking in attractive longer-term yields for investors who have been staying too short.
Are Treasury bonds better than municipal bonds?
As seen below, AAA-A rated municipal credits offer much higher yields than similar-quality corporate bonds and government-backed Treasuries across five-, 10- and 30-year periods. It is also worth noting that, over a decade, the tax-adjusted returns of A-rated municipal bonds currently rival those of equities.
