Money has continued to flow into municipal bonds, a market traditionally dominated by individual investors, despite debt woes in such high profile locations as Detroit and Puerto Rico, The New York Times
There have been 27 straight weeks of inflows into municipal bond funds, Dan Heckman, senior fixed income strategist with U.S. Bank wealth management, told the Times.
“The main reason for municipal bonds’ continued strength is that the interest paid on municipal bonds is free of federal and state taxes, which can exceed 50 percent for top earners in states like New York and California. Those savings give the bonds a substantial advantage over Treasury bonds with similar yields and even higher-yielding corporate bonds,” the Times explained.
Shorter-duration municipal bonds are more in favor than longer-duration bonds, even when they pay a quarter of what the longer ones do, because interest rates are expected to rise and the shorter term all but guarantees investors will be paid back, the Times explained.
“Six months to one-year munis have become a bigger part of the market,” said Kimberly Foss, founder of Empyrion Wealth Management. “Today, it’s about high-quality municipalities that will be able to pay the duration of the bond and give people the income they need. What’s left in their pocket after taxes is the most important thing for them.”
With longer-duration municipal bonds, the concern is that an increase in interest rates will erode the value of the investment, the Times explained.
To be sure, high-yield municipal bonds haven’t witnessed as many defaults compared to investment-grade corporate bonds, which led to fewer redemptions and boosted demand for munis.
"So high-yield muni bond funds are often considered less risky than corporate bonds. Data from Moody’s showed that 32.4% of corporate securities rated junk defaulted in the last ten years compared to only 7.5% of tax-exempt bonds rated junk," BlackRock explained to Yahoo Finance.
points out that closed-end municipal bond funds "make sense for investors who need extra income, but they should be long-term holdings since they aren’t very liquid and are leveraged, which can make them extra sensitive to changes in interest rates."
(Newsmax wire services contributed to this report).
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