Municipal bonds (“munis”) are debt securities issued by state and local governments.
What are municipal bonds? Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems.
High yields for a high-quality asset class
This means muni bonds are outperforming the 4% yield for Treasuries and 6% yield for the JULI Investment Grade Corporate Index. They are even topping the close to 6.5% annualized return for the S&P 500 Index since 2000.
Safety: Municipal bonds are considered a relatively safe fixed-income investment. GO bonds are usually considered safer than revenue bonds, as a municipality can raise taxes to cover outstanding debt obligations, whereas revenue bonds are subject to the earnings made by that particular project.
After a long and difficult 2022 year to date, the municipal bond market should fare better in 2023. We think that rates will be volatile due to Fed policy and concerns about economic growth. However, for the first time in a long time, investors can finally earn attractive yields without having to take on undue risk.
Tax Equivalent Yield = Tax-Free Yield/(1 – Tax Rate). In general, higher-income investors (with theoretically higher tax bills) are likely to benefit more from municipal bonds than individuals in other tax brackets.
If you are investing for income, either municipal bonds or money market funds will pay you interest. Just know that bonds can lose value and money market funds most likely won't. Note also that since municipal bonds are income-tax free, you are actually making more than the interest rate would indicate.
Most municipal bonds have a call provision entitling the issuer to redeem the bond at a specified price on a date prior to maturity. This generally would occur if the current interest rates are lower than they were at the time the investor purchased the bonds (unless the investor purchased the bonds at a premium).
Even though the average five-year municipal default rate since 2012 has been 0.1%, compared to 0.08% throughout the study period (1970-2021), it remains extremely low.
Additionally, muni bonds generally require a $5,000 minimum investment, while corporate bonds start at $1,000. In short, the risk-reward profile for munis and corporate bonds is different.
Bonds and interest rates have an inverse correlation: as interest rates increase, bond prices fall. However, the more the Federal Reserve hikes interest rates, the better it is potentially for municipal bond investors.
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.
When you buy a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period. At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to you.
Municipal bonds are typically sold in minimum increments of $5,000, pay interest on a semi-annual basis, and have maturities that range from less than one year to 30 years.
You have a choice between investing in general corporate bonds or tax-free municipal bonds. The corporate bonds yield 7%, and the tax-free municipal bonds yield 5%.
Municipal bonds (also known as "munis") are fixed-income investments that can provide higher after-tax returns than similar taxable corporate or government issues. In general, the interest paid on municipal issues is exempt from federal taxes and sometimes state and local taxes as well.
Most muni-bond CEFs--including RMM--pay us tax-free dividends, which can considerably boost their income stream's value to you, depending on your tax bracket.
2022 was the worst year on record for bonds, according to Edward McQuarrie, an investment historian and professor emeritus at Santa Clara University. That's largely due to the Federal Reserve raising interest rates aggressively, which clobbered bond prices, especially those for long-term bonds.
The sell-off can be attributed to a combination of factors including outflows from high yield and investment grade funds and less liquidity in the global markets. The municipal market is oversold and is now trading at valuations not seen since 2008-2009.
Many say munis have suffered from an overreaction by investors, who pulled out a record $87 billion from muni funds, spooked by inflation and aggressive action by the Federal Reserve to contain prices by raising interest rates.
Never Hold Tax-Free Municipal Bonds Through a Roth IRA.
Corporate Bonds Are Ideal When Income Is The Goal
The world's richest people often invest in corporate bonds, because bonds behave differently than stocks. Bonds are essentially loans taken out by corporations to raise needed funds, and bondholders benefit from the interest paid on these loans.