Despite rising interest rates, municipal bonds continue to perform well. The tax-exempt yield on municipal bonds has reached its highest level in more than a decade. Several munis are exempt from federal taxes, and some are also exempt from state and local taxes. This may help investors in higher tax brackets by increasing the revenue from the bond.
Tax-exempt bonds provide a variety of advantages to investors, including the chance to invest in low-risk, high-return assets that are normally tax-free. They also allow you to avoid paying state income taxes or capital gains taxes on dividends collected from these bonds.
Despite recent rate increases, municipal bonds have performed well over the last year. This is due to the fact that they are quite safe and can also help to protect against inflation.
Municipal bonds can be purchased in a variety of ways, including through a bond mutual fund or ETF (exchange-traded fund), as well as through a bank or online brokerage account. Furthermore, many funds provide a variety of maturities and quality levels to fulfill the needs of investors.
Tax-exempt bonds are used to fund a wide range of government projects, from schools and hospitals to water and sewer systems and public power utilities. But one significant change in the 2017 Tax Cuts and Jobs Act was the elimination of advance refunding, a crucial tax exemption provision that allowed issuers to renew their debt when interest rates fell.
Municipal bonds with high yields provide a compelling risk/return opportunity for investors seeking tax-free income that is often less volatile than Treasury bonds. With the Fed on a tightening path, now is a good time to consider expanding your fixed-income portfolio.
Despite accelerating fund outflows, the municipal bond market has been robust, with solid returns this year. It has generally regained momentum the year following a poor year, and this year's 4.1% comeback shows it may be on course for another strong year.
While interest rate volatility is expected to persist, municipal bonds should give favorable returns this year. Their yields are relatively acceptable when compared to other fixed-income sectors, and with the Fed projected to continue hiking rates, they will likely outperform Treasury bonds in 2023. Furthermore, municipal prices and yields should be supported by the current limited supply of munis and excellent credit fundamentals.
Despite rising interest rates, municipal bonds have performed well, demonstrating why tax-conscious investors are turning to them in their long-term portfolios. Munis are also safe investments, with historically low default rates, and could provide a strong chance of positive returns in the next few years.
Credit rating agencies provide them AAA, AA, or A ratings (see Exhibit 1). These ratings represent the financial strength of the issuer.
Municipal bond demand remains strong as federal stimulus permeates the economy, increasing revenues and liquidity. Demand is further supported by a lack of new issue supply.
Yet, increased interest rates remain a source of anxiety. Other vehicles that help mitigate losses, such as Consumer Price Index swaps, should be considered by investors. A well-diversified muni portfolio should also contain opportunities in midgrade and high-yield loans, which may provide additional income.
Diversification is the process of distributing your money among many sorts of investments. This reduces risk and increases the possibility that you will be able to ride out your portfolio's ups and downs.
A portfolio that comprises many asset classes, such as equities, fixed income, commodities, and cash, is the most diversified. This can also help to lessen the dangers associated with a recession.
Furthermore, diversification might help protect your money if you lose a single investment in your portfolio. For example, if you put 100% of your money in stocks and the market crashes, your entire portfolio will suffer losses.
Notwithstanding recent interest rate increases, municipal bonds have performed well and continue to provide an appealing relative value. Municipal yields have risen less frequently and are lower than taxable bond yields, with modest connections to other asset classes.