Why Invest in Municipal Bonds
Municipal bonds typically provide the following benefits to investors:
Potential Safety of Principal
When investing in municipal bonds, investors are paid back the full face value of their investment at maturity or earlier if called, unless the bond defaults. This is important because many investors, particularly those nearing retirement or in retirement, are concerned about protecting their principal. In August of 2019, Moody’s published research that showed that rated investment-grade municipal bonds had an average cumulative 10-year default rate of just 0.10% between 1970 and 2018.* The reason for this low historical rate of default is that many municipal bonds are backed by the unlimited taxing power of the local government issuing them. Such bonds are referred to as a “General Obligation Bond” (or “GO”), and are backed by the full faith, credit and taxing power (i.e. income, property, sales, and vehicle taxes, tolls, special levies, etc.) of an issuer** to pay back the principal and interest owed to bondholders. General Obligation Bonds thus offer a measure of safety to bondholders because unlike corporations, local governments rarely cease to exist and dissolve altogether. As long as they exist, municipalities should be able to generate tax revenue sufficient to meet their obligations to bondholders.
Potential Tax-Free Income
All municipal bonds pay interest that is exempt from federal income taxes. Depending on the place of issue and place of residence of individual investors, interest on municipal bonds can also be exempt from State and local taxes. As a general rule, the higher the income tax bracket, the more investors benefit from tax-free municipal bonds.
Potential Regular Predictable Income
Municipal bonds typically pay interest every six months unless they get called or default. That means that you can count on a regular, predictable income stream. Because most bonds have call options, which means you get your principal back before the maturity date, subsequent municipal bonds you purchase can earn more or less interest than the called bond. According to Moody’s 2019 research,* default rates are historically low for the rated investment-grade bonds favored by Hennion & Walsh.
Marketability/Liquidity
Holders of municipal bonds can sell their bonds in the secondary market through one of the many banks and securities dealer firms which are registered to buy and sell municipal securities. Municipal bonds are sold in the over-the-counter market instead of an organized exchange. If you sell your bonds prior to maturity, you will receive the current market price, which may be more or less than the original cost.
To get more detailed information about the benefits and risks associated with investing in municipal bonds, please download our free bond guide, or call us at (800) 836-8240 to speak to one of our representatives.
* Source: Moody’s Investor Service, August 6, 2019 “US Municipal Bond Defaults and Recoveries, 1970–2018.”
** Municipal Securities Rule Making Board Website
All investments involve risk, including loss of principal. Past performance does not guarantee future returns. Income from certain Municipal Bonds may be subject to the Federal Alternative Minimum Tax.