How Do I Invest In Municipal Bonds – If you own municipal bonds, you probably know they’ve had a rough year as the Federal Reserve raised interest rates sharply. Rising interest rates have a negative impact on the price of bonds, including municipal bonds; this causes many investors to sell, which increases the pressure on bond prices.
But now it gets interesting. As prices fell, municipal bond yields rose to the highest levels in more than a decade. They are currently higher than most other bond yields and are close to annual long-term equity returns.
How Do I Invest In Municipal Bonds
Also, while higher-yielding bonds typically require investors to accept higher default risk, most municipalities currently have extremely strong financial positions, which should translate into relatively lower risk.
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Bloomberg’s municipal bond index is down 12.5% this year through Nov. 7, one of the worst-performing years on record. But its performance rose from 1% to almost 4%.
More importantly, the tax-equivalent yield (the highest yield a taxable bond would need to match that of a tax-exempt muni bond) rose to 7%, the highest level in more than a decade.
That means municipal bonds outperform the 4% yield on Treasuries and the 6% yield on the JULI Investment Grade corporate index. They even beat the S&P 500’s nearly 6.5% annualized return since 2000.
To get high returns, you usually have to take more risk. For example, the only major US bond asset class that yields more than municipal bonds is high yield, where issuers are rated below investment grade because they have a higher risk of default .
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But here’s the good news: Muni bonds now not only offer high yields, they’re also a higher-quality asset class. About 85% of the market is rated A or better.
And the current fundamentals are especially good. Buoyed by support from federal fiscal and monetary policy during the pandemic, municipal revenues have surprisingly risen over the past two years.
One result is that many state and local jurisdictions have been able to bolster their rainy day funds, offer tax breaks, pay down debt or pay supplemental pensions.
In 2022, the public finance system remains flush with cash, benefiting from federally funded relief such as the CARES Act (Coronavirus Relief and Economic Security Act) and ARPA (The American rescue plan), among others.
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At the same time, housing prices and wages continued to rise, increasing municipal income from property and wage taxes. Tax revenues rose 18.2% this year, on average, in the 40 states that provided tax data through July.
This exceptionally strong financial position means that most municipal bond issuers are unlikely to default on their payments, even if the economy goes into recession, resulting in lower municipal revenues.
Sources: Individual State Monthly Tax Reports, J.P. Morgan. Data as of September 7, 2022. Note: Oregon, Wyoming and Alaska do not provide monthly tax data. Gray bars indicate that July data is not yet available and the cumulative period has been adjusted. Indices are not investment products and cannot be considered investments. Past performance is not indicative of future results.
The chart shows the percentage change in annual tax revenue in 2022 compared to 2021. Annual revenue has increased by at least 10% in most states.
Taxable Municipal Bonds Are Booming. Here’s How To Invest In Them.
While rate volatility may remain high in the near term, the higher yield on municipal bonds now offers better protection against further price declines if interest rates continue to rise.
Municipal bonds could also be useful in a portfolio in the opposite scenario: if the economy goes into recession and interest rates fall, municipal bond prices would appreciate (essentially the opposite of what happened), which which could increase the total return on municipal bonds at some point. . when equity returns may be lower.
We believe municipal bonds now offer exceptional value for investors looking to extend the duration of fixed income portfolios and secure high returns over a multi-year period. Investors have implementation options.
Your J.P. Team Morgan can help you evaluate which municipal bond opportunities can help you achieve your long-term goals. You can also learn more about investing in fixed income securities here.
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Investors should understand the potential tax liabilities associated with purchasing municipal bonds. Some municipal bonds are federally taxed if their holder is subject to an alternative minimum tax. Capital gains, if any, are subject to federal taxes. An investor should note that income from tax-exempt municipal bond funds may be subject to state and local tax and the alternative minimum tax (AMT).
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The Bloomberg Municipal Bond Index covers the long-term dollar-denominated tax-exempt bond market. The index comprises four main sectors: general state and local bonds, revenue bonds, insured bonds and prepaid bonds.
The JPM Investment Grade Index (JULI) provides performance comparisons and valuation metrics across a carefully defined universe of investment grade corporate bonds, tracking individual issuers, sectors and subsectors according to their different ratings and maturities.
The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure the performance of the entire national economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the base period 1941–43.
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Among A Group Of 2,500 People, 35 Percent Invest In Municipal Bonds, 18 Percent Invest In Oil Stocks, And 7 Percent Invest In Both Municipal Bonds And Oil Stocks. If 1 Person
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