Municipal bonds often provide a steady and efficient flow of income to investors. Over my career, they have played a very important role and, until 2008, had done so with little worry. It is time to take a good look at them again and put into perspective the current condition of the municipal bond market.
First of all, municipal bonds are usually forms of general obligation debt offered by municipalities on both a tax-exempt and taxable basis. Tax revenue typically pays the investor making the bonds relatively safe so long as the municipality is solvent and able to collect sufficient tax revenue. My take – I believe the credit risks of most municipalities are overstated. Default rates are very low as a percentage of outstanding issues.
Price matters when investing in bonds. The higher the price you pay, the lower your yield and vice versa. Current pricing of municipal bonds appears to be favorable; valuations are attractive. Concerns of price declines caused by rising bond yields are not a major concern due to low inflation, high unemployment, and a “benign Fed” ~ Andrew Valerie, CFA, Sr. Vice President of LPL Financial.
Yields are respectable when compared to Treasuries and many investors will realize significant tax savings/yield enhancement.
Bottom line = I like the sector at this time.
Important disclosures: Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Interest income may be subject to alternative minimum tax. Municipal bonds are Federally tax-free but other state and local taxes may apply.
Susan R. Linkous