Municipal securities, or “munis,” are bonds issued by states, cities, counties, and other government bodies to raise funds for public projects such as roads, schools, and other infrastructure.
Munis pay a predetermined amount of interest (typically semiannually) and refund the principle on a predetermined maturity date. The majority of municipal bonds are offered in $5,000 increments and have maturities ranging from 2 to 5 years to very long (30 years).
When considering a municipal bond investment, keep in mind that no two municipal bonds are alike, and carefully assess each one, making sure to get the most up-to-date information on both the bond and the issuer. See FINRA’s Investor Alert Municipal BondsImportant Considerations for Individual Investors for further information.
Buying and Selling Munis
Some municipal bonds have a higher level of liquidity than others. Some bonds trade frequently, while others may go weeks without any activity (no interested buyers or sellers). Municipal bonds, in general, are more susceptible to supply and demand pressures than other fixed-income securities. As a result, you’re taking on more market risk: If your bond is out of favor with other investors when you need to sell it, the price you get in the secondary market will fall. Of course, munis, like all bonds, are susceptible to interest rate risk: if rates rise faster than your bond’s rate, the bond’s secondary market value drops.
Because of the overwhelming amount of muni bonds available and the tremendous competition among dealers for a piece of the pie, muni investment should be approached with caution. Do your homework, beginning with selecting an investment professional with a track record of success in municipal securities.
When considering a municipal bond investment, keep in mind that no two municipal bonds are alike, and carefully assess each one, making sure to get the most up-to-date information on both the bond and the issuer.
Munis and Taxes
The principal reason why most private investors purchase municipal bonds is to benefit from preferential tax treatment on the interest they earn. The great majority of municipal bond interest is tax-free in the United States. Indeed, municipal securities are the only ones that fall within this category.
Furthermore, if you live in the state or city that issued the bond, your interest income may be exempt from state or city taxes. Residents of all states are excluded from paying taxes on bonds issued by Puerto Rico, Guam, and other US territories.
The federal government does not exclude all municipal bonds from taxation. Municipal bonds that are taxable may be issued to fund projects that the federal government would not fund. To make up for the lack of a tax advantage, these bonds often have higher yields than tax-exempt municipal bonds, and are more in line with corporate or agency bond rates.
The AMT (alternative minimum tax) is a tax that some persons must pay. The AMT is calculated using a separate set of principles than your regular income tax calculation, but you must pay whichever calculation is higher. The AMT may apply to investors who buy “private activity” municipal bonds, which are bonds that aren’t solely used for government activities. Interest gained on these “private activity bonds” cannot be deducted under AMT rules, unlike interest earned on other municipal bonds, including 501(c)(3) private activity bonds, and may result in an AMT payment. Before advising a tax-exempt investment, a reputable financial adviser should assess your AMT liabilities. A tax professional’s counsel is also recommended.
What factors should I consider while purchasing a municipal bond?
- Step 1: Determine the level of credit risk you are willing to accept. The default rate on rated municipal bonds is extremely low overall.
- Step 2: Examine the yield curve to determine how much interest rate risk you are willing to accept.
In 2020, are municipal bonds a decent investment?
- Municipal bond interest is tax-free in the United States, however there may be state or local taxes, or both.
- Be aware that if you receive Social Security, your bond interest will be recognized as income when determining your Social Security taxable amount. This could result in you owing more money.
- Municipal bond interest rates are often lower than corporate bond interest rates. You must decide which deal offers the best genuine return.
- On the bright side, compared to practically any other investment, highly-rated municipal bonds are often relatively safe. The default rate is quite low.
- Interest rate risk exists with any bond. You’ll be stuck with a bad performer if your money is locked up for 10 or 20 years and interest rates climb.
Which municipal bond is the best?
“BlackRock Allocation Target Shrs Ser E: BATEX: Quote,” according to Morningstar. On the 13th of December, 2021, I was able to get a hold of some information.
“BlackRock Allocation Target Shrs Ser E: BATEX: People,” according to Morningstar. On the 14th of December, 2021, I was able to get a hold of some information.
Pages 23 (Pages 34 of PDF) of BlackRock’s “Summary Prospectus: BlackRock Allocation Target Shares: BATS: Series E Portfolio: BATEX.” On the 14th of December, 2021, I was able to get a hold of some information.
“BlackRock Allocation Target Shrs Ser E: BATEX: Portfolio,” according to Morningstar. On the 14th of December, 2021, I was able to get a hold of some information.
“BlackRock High Yield Municipal Inv A: MDYHX: Quote,” according to Morningstar. On the 13th of December, 2021, I was able to get a hold of some information.
“BlackRock High Yield Municipal Inv A: MDYHX: People,” according to Morningstar. On the 14th of December, 2021, I was able to get a hold of some information.
“MDYHX: High Yield Municipal Fund: Investor A,” according to BlackRock. On the 14th of December, 2021, I was able to get a hold of some information.
“BlackRock High Yield Municipal Inv A: MDYHX: Portfolio,” according to Morningstar. On the 14th of December, 2021, I was able to get a hold of some information.
Morningstar. “Transamerica High Yield Muni I2: THYTX: Quote,” according to the website. On the 13th of December, 2021, I was able to get a hold of some information.
Morningstar. “People.” “Transamerica High Yield Muni I2: THYTX: Transamerica High Yield Muni.” On the 14th of December, 2021, I was able to get a hold of some information.
“Transamerica High Yield Muni: Share Class I2: THYTX,” according to Transamerica. On the 14th of December, 2021, I was able to get a hold of some information.
Morningstar. “Transamerica High Yield Muni I2: THYTX: Portfolio,” according to the website. On the 14th of December, 2021, I was able to get a hold of some information.
“Delaware National Hi-Yld Muni Bd Instl: DVHIX: Quote,” according to Morningstar. On the 13th of December, 2021, I was able to get a hold of some information.
“Delaware National Hi-Yld Muni Bd Instl: DVHIX: People,” according to Morningstar. On the 14th of December, 2021, I was able to get a hold of some information.
“Summary Prospectus: Delaware National High-Yield Municipal Bond Fund,” Macquarie Asset Management. On the 14th of December, 2021, I was able to get a hold of some information.
Macquarie’s Delaware Funds “Delaware National High-Yield Municipal Bond Fund: Institutional Class (DVHIX)” is a fund that invests in high-yield municipal bonds in Delaware. On the 14th of December, 2021, I was able to get a hold of some information.
“Delaware National Hi-Yld Muni Bd Instl: DVHIX: Portfolio,” according to Morningstar. On the 14th of December, 2021, I was able to get a hold of some information.
Morningstar. “JPMorgan Tax Aware Real Return A: TXRAX: Quote,” according to the website. On the 14th of December, 2021, I was able to get a hold of some information.
Morningstar. “JPMorgan Tax Aware Real Return A: TXRAX: People,” according to JPMorgan. On the 14th of December, 2021, I was able to get a hold of some information.
J.P. Morgan Asset Management is a financial services firm based in New York. “TXRAX: JPMorgan Tax Aware Real Return Fund, Share Class A.” On the 14th of December, 2021, I was able to get a hold of some information.
Morningstar. “JPMorgan Tax Aware Real Return A: TXRAX: Portfolio,” according to JPMorgan. On the 14th of December, 2021, I was able to get a hold of some information.
Is municipal bond interest taxable?
Residents of the issuing state are generally excluded from federal and state taxes on income earned from municipal bonds. While interest income is tax-free, any capital gains delivered to the investor are taxable. The Federal Alternative Minimum Tax may apply to some investors’ earnings (AMT).
What is the significance of Moody’s rating?
The goal of Moody’s ratings is to “present investors with a simple system of grading by which future relative creditworthiness of securities can be gauged,” according to the company. Moody’s adds numerical modifiers 1, 2 and 3 to each of its ratings from Aa to Caa; the lower the number, the higher the rating. This does not affect Aaa, Ca, or C. According to Moody’s, its ratings “should not be taken as recommendations” or used as the primary basis for investing decisions. Furthermore, its ratings are unrelated to market price, even if market conditions might influence credit risk.
Are there ratings on government bonds?
Non-investment grade bonds (junk bonds) are typically rated “BB+” to “D” by Standard and Poor’s (or “Baa1” to “C” by Moody’s). Bonds of this type are sometimes designated as “not rated.” Despite the fact that bonds with these ratings are considered higher-risk investments, certain investors are lured to them because of the large yields they offer. However, certain trash bonds have liquidity problems and may default, leaving investors with nothing. The Southwestern Energy Company issued a non-investment grade bond, which was given a “BB+” rating by Standard & Poor’s, indicating a negative outlook.
How do bonds get their ratings?
Bond ratings are assigned letters ranging from “AAA” to “D,” with “AAA” being the highest and “D” being the lowest. Different rating systems employ the same letter grades but differentiate themselves by using different combinations of upper- and lower-case letters and modifiers.
Why are municipal bonds in decline?
Some economists predict a reduction in muni demand this year due to a predicted slowing in household savings, which grew during the pandemic, particularly among the wealthy. The demand for tax-exempt debt has long outstripped annual issuance.
Opportunity cost
Municipal bonds’ tax advantages aren’t as valuable if you’re in a lower tax band as they are if you’re in a higher tax bracket.
If that’s the case, you could be better off putting your money into alternative investments for a larger return.
They may not be liquid
If you need money quickly, you should be aware that municipal bonds may have liquidity problems.
You might not be able to find an active market for your bonds, which means you won’t be able to sell them when you want at the price you want.