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 risks of municipal bonds?
Important information on risk
Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities.
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.
Which of these is a disadvantage of municipal bonds?
Cons of Municipal Bonds
Limited returns: Bonds in general are a fixed income investment with low risk and correspondingly low, predictable returns. But municipal bonds tend to have even more conservative rates than other fixed income assets, such as corporate bonds.
Are municipal bonds a good investment in 2024?
Absolute rates are high now, but we expect them to move lower in 2024. There are two main reasons why we believe munis are an area of potential opportunity in 2024: high yields and strong credit quality. To illustrate, the yield-to-worst for the Bloomberg Municipal Bond Index, a broad based index, is 3.7%.
What is a con of a municipal bond?
| Pros | Cons |
|---|---|
| Tax-exempt from federal tax and possibly state and local tax | The bond price could fall |
| Low volatility | Not inflation-friendly |
| Minimal default risk | Still a chance of default |
What is the primary concern when investing in a municipal bond?
Market Risk
Changes in interest rates and interest rate expectations are generally the primary factors involved in municipal bond secondary market prices. When interest rates fall, newly issued bonds will pay a lower yield than existing issues, which makes the older bonds more attractive.
Do municipal bonds do well in a recession?
With their strong credit ratings, favorable credit conditions, and historically positive performance during recessions, municipal bonds emerge as an attractive choice.
Are municipal bonds better than CDs?
If you're looking for safety and predictability with your investments, CDs and bonds can offer both. However, CDs may ultimately be better for those who prefer the comfort of an insured investment. Bonds could be a better choice for those needing the tax advantages that municipal bonds offer.
What happens to municipal bonds when rates go up?
The price and yield (the income return on an investment) of a bond generally have an inverse relationship. In other words, as the price of a bond goes down, the yield goes up and vice versa. Thus, when interest rates rise, a bond's price usually declines because an investor can earn a higher yield with another bond.
Should you buy municipal bonds now?
Still, some leading investment managers and analysts suggest it's time for investors to come back home to municipal bonds. "After two tumultuous years, we expect a municipal market recovery in 2024," says Robert DiMella, executive managing director, co-head of MacKay Municipal Managers.
What is the safest type of municipal bond?
General obligation (GO) bonds are funded directly by tax revenues. They are the safest type of municipal bond, but they often have the lowest interest rates.
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.
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.
Are municipal bonds a smart investment?
Default Risk
Between 1970 and 2022, the cumulative 10-year default rate averaged over that time period was just 0.15%. This includes not only higher rated municipal bonds, but lower grade ones as well. This is why municipal bonds are classified as low-risk investments.
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.
Can municipal bonds lose money?
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.
How do I avoid taxes on municipal bonds?
Zero-coupon municipal bonds, which are bought at a discount because they do not make any interest or coupon payments, don't have to be taxed. In fact, most aren't. As long as you're investing in a local municipal bond, taxes won't be a concern. This provides a big advantage over taxable bonds, even with lower interest.
How often do municipal bonds fail?
How rare are municipal bond defaults? Cumulative default rates for investment-grade municipal bonds total 0.09% over ten-year periods, on average. This compares with 2.17% for the global corporate market—well over twenty times that of municipals according to Moody's data as of December 31, 2021.
What are some reasons why a person would invest in a municipal bond?
These can be thought of as loans that investors make to local governments, and are used to fund public works such as parks, libraries, bridges and roads, and other infrastructure. Interest paid on municipal bonds is often tax free, making them an attractive investment option for individuals in high tax brackets.
Why do people invest in municipal bonds?
Tax minimization: Many municipal bonds are exempt from federal taxes, and if the investor lives in the same state where the bond is issued, the muni will often be exempt from state and local taxes as well. This especially benefits investors in a higher tax bracket, as the tax exemption enhances the bond's return.
Why do investors like municipal bonds?
Muni bonds tend to be high-quality investments.
The five-year cumulative default rate for muni bonds was only 0.08% from 1970-2021. Global corporate bonds defaulted at 6.8% over the same time frame. What's more, many municipalities were bolstered by direct federal aid during the pandemic.
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.
What happens if bond market crashes?
So, if the bond market declines or crashes, your investment account will likely feel it in some way. This can be especially concerning for investors with portfolios heavily weighted toward bonds, such as those in or near retirement.
