- 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
Who buys municipal bonds and why?
Municipal bonds (munis) are issued by state, county, and local governments to support public works projects such as road maintenance and other construction projects. Investors should consider the tax-equivalent yield when deciding whether municipal bonds are a better investment than taxable bonds or CDs.
Who are the biggest investors in municipal bonds?
- The bond market is a financial market where investors can purchase debt securities issued by governments or companies.
- To raise funds, issuers sell bonds or other debt instruments; the majority of bond issuers are governments, banks, or corporations.
- Investment banks and other firms that assist issuers in the sale of bonds are known as underwriters.
- Corporations, governments, and individuals who buy bonds are buying debt that is being issued.
Who are the main purchasers of municipal bonds?
Individual households (individual investors), mutual and money market funds, life and property and casualty insurance firms, closed-end investment funds, commercial banks, and overseas investors are the most prevalent municipal bond holders, according to the Federal Reserve.
Municipal bonds help who the most?
Tax-Free Yield/(1 Tax Rate) = Tax Equivalent Yield. Municipal bonds are likely to benefit higher-income investors (with theoretically greater tax bills) more than persons in other tax categories.
What is causing the decline in municipal bond funds?
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.
Is it wise to invest in municipal bonds in 2022?
The municipal market enters 2022 with a strong credit foundation and a favorable technical environment. However, the rate of credit improvement is expected to decelerate in 2022, and weaker demand and greater bond supply are more likely in 2022 than in 2021.
Low default rates, an upward ratings bias, substantial revenue growth, extensive federal backing, and recovering pension funds characterize the credit market. The credit issues presented by the Omicron version are doable. However, given emerging risks such as climate change, inflation, labor shortages, disruptions in public schools, a more entrenched remote work culture, and a return to a less reliable federal funding environment, the favorable credit environment could deteriorate later in the year, especially if Republicans retake the House or Senate in the November 2022 midterm elections.
In terms of market technicals, the year 2021 was marked by robust municipal bond fund inflows (demand) and limited supply growth. In 2021, strong inflows combined with a restricted supply of tax-exempt bonds resulted in historically low ratios and narrow credit spreads.
In 2022, we don’t expect any notable changes in ratios or spreads. Higher tax rates are still being debated in Congress, and the increased money supply is unlikely to grow significantly. If the Federal Reserve (Fed) raises rates as expected, issuers continue to see value in tax-exempt refundings and taxable advance refundings, and the market endures bouts of outflows and weak demand, periods of somewhat reduced demand and greater supply are possible. In short maturities, we prefer assuming a little more credit risk and opportunistic buying if ratios or spreads widen.
When are municipal bonds available for sale?
When interest rates are expected to climb dramatically, this is the most important sell signal in the bond market. Because the value of bonds on the open market is primarily determined by the coupon rates of other bonds, an increase in interest rates will likely lead current bonds your bonds to lose value. As additional bonds with higher coupon rates are issued to match the higher national rate, the market price of older bonds with lower coupons will fall to compensate new buyers for their lower interest payments.
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 motivates people to purchase bonds?
- They give a steady stream of money. Bonds typically pay interest twice a year.
- Bondholders receive their entire investment back if the bonds are held to maturity, therefore bonds are a good way to save money while investing.
Companies, governments, and municipalities issue bonds to raise funds for a variety of purposes, including:
- Investing in capital projects such as schools, roadways, hospitals, and other infrastructure
Municipal bonds make sense at what tax rate?
This is where you decide whether or not a muni is right for you. Divide its return, say 1.20 percent, by your reciprocal rate of 68 percent to get 1.76 percent. That’s your tax-equivalent yieldor, to put it another way, your muni tipping point. It means that, assuming all other factors such as maturity and rating are identical, a taxable bond must yield more than 1.76 percent to make more sense for someone in your tax bracket than a 1.20 percent tax-exempt bond.