A substantial amount of secondary market trading occurs since there are around one million different municipal securities outstanding in the market at any given moment. However, the likelihood of a certain bond becoming available in the secondary market at any given time is slim.
Where can municipal bonds be purchased?
- Use the services of a municipal securities dealer, such as a broker-dealer or a bank department. A private client broker is a broker who primarily deals with individual investors at a full-service broker-dealer, though they may also be referred to as “financial consultant” or “financial adviser.” The investor must make an explicit order to buy or sell securities in a brokerage account, and purchases and sells of municipal bonds through a broker-dealer must be preceded by a discussion with the investor.
When selling municipal securities, broker-dealers, like all other forms of investment alternatives, have particular responsibilities to investors. For example, when an investor buys or sells a municipal security, a broker-dealer must provide all material information about the investment to the investor and must give a fair and reasonable price. Full-service When broker-dealers buy or sell bonds for investors, they charge a fee. Broker-dealers that act “as principal” (that is, facilitate trades through their own inventory) charge a “mark-up” when selling bonds to investors and a “mark-down” when buying bonds from investors. The fee is called a “commission” when broker-dealers act “as agent” (that is, when they help identify a buyer or seller who deals directly with the investor). The MSRB pamphlet contains useful information on mark-ups and mark-downs, as well as other fees that brokers may charge.
- Engage the services of an investment adviser who can identify and trade bonds based on your specific or broad instructions. A registered investment adviser (RIA) manages accounts and acquires and sells securities in line with an investor’s agreed-upon plan without requiring individual consent for each transaction. When you engage an RIA, you should receive written paperwork that specifies both your account’s investment policy and the RIA’s investment procedure. To get a better price, RIAs frequently bundle purchases for multiple clients by trading in larger blocks. Account holders are frequently charged a management fee by RIAs. Some advisers price differently based on the interest rate environment and the interest profits that come with it.
- A self-managed account allows you to trade straight online. Another alternative for investors who wish to purchase and sell muni bonds on their own is to use a self-managed account, commonly known as “direct online trading,” which allows them to do so without the help of a private client broker or RIA. This is a broker-dealer account that charges commissions, mark-ups, and markdowns just like a full-service brokerage account. The firm has the same responsibilities to investors as any other broker-dealer, but it may perform them in a different way. For example, disclosure regarding a certain bond could be done only through electronic means, with no interaction with a private client broker. A self-managed account necessitates that the investor comprehend the benefits and drawbacks of each transaction.
- Purchase or sell municipal bond mutual fund shares. Another approach to engage in the municipal bond market is to purchase shares in a mutual fund that invests in muni bonds. Municipal bond mutual funds, which invest entirely or partially in municipal bonds, can be a good method to diversify your portfolio. While municipal bond funds can provide built-in diversification, you do not own the bonds directly. Instead, you hold a piece of the fund’s stock. This is significant because interest rate fluctuations have a different impact on municipal bond mutual fund owners than they do on direct municipal bond owners. Many investors who purchase individual municipal bonds aim to retain them until they mature, despite the fact that bond market values fluctuate between purchase and maturity. Mutual fund managers, on the other hand, are aiming for a stable or rising share price. If rising interest rates cause the market value of bonds in a mutual fund’s portfolio to drop, some of those bonds will be sold at a loss to avoid additional losses and pay for share withdrawals. You are subject to potential swings in the mutual fund’s value as a mutual fund stakeholder.
- Purchase or sell municipal bond exchange-traded funds (ETF). ETFs are a hybrid of mutual funds and traditional equities. The majority of municipal bond ETFs are structured to track an index. The share price of a municipal bond ETF can fluctuate from the ETF’s underlying net asset value (NAV) because it trades like a stock. This can add a layer of volatility to the price of a municipal bond ETF that a municipal bond mutual fund does not have. When an investor buys or sells shares of a municipal bond ETF, the transaction takes place over the exchange between investors (buyers and sellers). When an investor buys or sells shares in a municipal bond mutual fund, on the other hand, the transaction is handled directly by the mutual fund company. Municipal bond ETFs trade like stocks during market hours. A single purchase or sale of municipal bond mutual funds is permitted per day.
Expenses for mutual funds and ETFs include sales commissions, deferred sales commissions, and a variety of shareholder and running fees. FINRA’s Fund Analyzer allows you to compare fund fees and expenses.
Regardless of how you participate in the municipal bond market, the MSRB advises that you think about your investment needs and get written information from your financial professional regarding how fees are charged and which costs apply to your account before investing in a muni bond.
How do municipal bonds become purchased?
A municipal bond enters the secondary bond market once it is issued for the first time. The majority of muni bond trading takes place in the secondary market. Bonds are purchased and sold over the counter, which means they are not traded on regulated exchanges like stocks.
Is it possible to acquire municipal bonds directly?
Individual municipal bonds can be purchased from bond dealers, banks, and brokerage firms. You may even be able to purchase them straight from the municipality in some situations.
In 2021, 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.
What are the economic benefits of financing with municipal bonds?
- Municipal bonds are typically used to fund capital projects rather than recurring expenses (such as salaries or government benefits).
- Schools, acute care hospitals, roads, highways, and bridges; airports; subways; seaports and marine terminals; water and wastewater facilities; multi-family housing; libraries and town halls; electric power and natural gas equipment for city-owned utilities; and other public projects are all included in these investments.
- In the last decade, $2 trillion in infrastructure construction has been financed with tax-exempt municipal bonds. 1
- Municipal bonds account for over two-thirds of the nation’s essential infrastructure. 2
Who buys municipal bonds?
- Individuals own about 72 percent of bonds, either personally or through mutual funds and other vehicles.
- Households with incomes of less than $200,000 receive roughly 40% of municipal bond interest. 4
- Businesses, particularly property and liability and life insurance companies, but also banks, own about 25% of bonds.
Why do investors buy municipal bonds?
- The municipal bond market is known for its stability, which attracts investors.
- Bonds have been issued by state and municipal governments for centuries, and they are a well-known and well-regulated financial tool.
- Investors benefit from the exclusion of interest from federal income tax.
- Investors, on the other hand, accept a reduced rate of return on the bond in exchange for the tax benefit, which reduces or eliminates any tax “windfall.”
What are the financial benefits of financing with municipal bonds?
- Municipal bond-financed projects cost $495 billion less in the last decade than taxable debt-financed projects. 6
How do bonds promote fiscal responsibility?
- Bonds are approved by a voter referendum or a governmental body’s affirmative vote (a city council, county council, utility board, or the like).
- While the federal debt has nearly doubled in real terms and as a percentage of GDP over the last decade, state and municipal debt has stayed constant. 7
What are agency bonds in the US?
Bonds issued by government-sponsored enterprises (GSEs) or US government agencies are known as US government agency bonds. GSEs are non-profit organizations founded with a public purpose and funded by the federal government. Typically, agency bonds are issued in $1,000 denominations.
The Federal Home Loan Banks (FHLB) and the Federal Farm Credit Banks (FFCB), which are regional bank systems, are examples of GSEs. The Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Mortgage Corporation (FHLMC or Freddie Mac) are privately held businesses established by the federal government to provide liquidity and expand credit availability in the mortgage industry.
Federal institutions such as the Government National Mortgage Association (GNMA or Ginnie Mae) are backed by the United States government’s full faith and credit. Mortgage pass-through securities are frequently used to issue GNMAs.
- The government of the United States does not guarantee GSE debt. GSE debt is completely the issuer’s responsibility, and hence has a higher credit risk than US Treasury securities.
- Interest earned on agency bonds is normally taxed at both the federal and state levels.
- State taxes are not levied on interest on some agency bonds, such as those issued by the FHLB and FFCB.
- When agency bonds are purchased at a discount, they may be subject to capital gains taxes when sold or redeemed. For more information, investors should speak with a tax professional.
- GSE or agency bonds are not traded by Vanguard Brokerage Services. Vanguard Brokerage can provide access to a secondary over-the-counter market if you wish to sell your GSE or agency bonds before they mature. Liquidity for GSE or agency bonds is normally provided by the secondary market, however liquidity varies based on a bond’s attributes, lot size, and other market conditions. It may be difficult to sell GNMAs that have had a large principal reduction.
- Vanguard Brokerage may receive a concession from the issuer on new issue agency bonds purchased in the primary market. Vanguard Brokerage has the right to levy a commission if a concession is not available. Transactions in the secondary market will be subject to commissions.
- Interest rates can cause the price of agency bonds to rise or fall. Long-term bond prices are more affected by interest rate movements than short-term bond prices.
- All agency bonds are subject to the risk that the issuer will default or be unable to make timely interest and principal payments. GSE debt is completely the issuer’s responsibility, and hence has a higher credit risk than US Treasury securities.
- Call provisions on some agency bonds allow the issuer to redeem the bonds before the stated maturity date. During periods of falling interest rates, issuers are more likely to call bonds.
- Economic, political, legal, or regulatory changes, as well as natural calamities, can have an impact on a GSE or agency issuer’s financial status and capacity to make timely payments to bondholders. Event risk is unpredictable and has the potential to have a major impact on bondholders.
- Agency bonds that are sold before their maturity date may be liable to a significant gain or loss. The secondary market may be restricted as well.
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).
Do municipal bonds have a monthly payment?
The Tax Benefits of Municipal Bonds The majority of municipal bonds and short-term notes are issued in $5,000 or multiples of $5,000 denominations. Interest on bonds is usually paid every six months (though some forms of bonds work differently), while interest on notes is usually paid when the note matures.