Are Municipal Bonds A Good Investment Now – If you own municipal bonds, you probably know that they’ve had a tough year since the Federal Reserve raised interest rates sharply. Rising interest rates negatively affect the value of bonds, including bonds; This encourages more investors to sell, putting more pressure on bond prices.
But now it’s getting interesting. As rates fell, muni bond yields rose to their highest levels in more than a decade. They are currently higher than other bond yields and closer to long-term annual returns.
Are Municipal Bonds A Good Investment Now
Moreover, high-yield bonds require investors to accept a higher risk of default, and many municipalities currently have strong financial positions that should translate into lower risk.
Municipal Bonds Increasingly Held By Funds Instead Of Individuals
The Bloomberg Municipal Bond Index has fallen 12.5% this year through November 7. But its yield increased from 1% to 4%.
More importantly, the tax yield (the maximum yield on a tax bond must be the same as a no-tax bond) rose to 7%—the highest level in more than a decade.
This means the muni bond outperforms the 4% yield on Treasuries and the 6% yield on the JULI investment-grade corporate index. They have contributed to the S&P 500’s 6.5% annual return since 2000.
To get higher returns, you usually have to take more risk. For example, high-yield is the only major fixed-income asset class in the US that offers a higher yield than bonds, and issuers are rated below investment grade because they have a higher risk of default.
Why 2022 Has Been Such A Terrible Year For Bond Funds
But here’s the good news: Not only do muni bonds offer the highest yields right now, they’re also a superior asset class. About 85% of the market is rated A or higher.
And the current infrastructure is in very good condition. Municipal revenues have risen to record levels over the past two years, boosted by fiscal and monetary policy support during the pandemic.
One result is that many state and local governments have been able to increase their “rainy day” funds, offer tax breaks, pay down debt or add to pension funds.
In 2022, the public financial system will continue to be saturated, benefiting from aid supported by the federal government, including the Coronavirus Relief, Assistance and Economic Protection (CARES) and the American Recovery Plan Act (ARPA).
Municipal Market Insights
At the same time, housing prices and incomes continue to rise, and municipal revenues from property and income taxes increase. In the 40 countries that provided tax data in July, tax revenue rose an average of 18.2% this year.
This extremely tight financial situation means that many municipal bond issuers are unlikely to default on their payments, even as the economy slows and municipal revenues fall.
Sources: Monthly State 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 data for July is not yet available and the season has been adjusted to date. Indices are not investment products and should not be considered for investment purposes. Past performance is no guarantee of future results.
The chart shows the percentage change in annual tax revenue for 2022 compared to 2021. YTD revenue is up at least 10% in most countries.
Watch How Recent Rate Volatility Impacts Municipal Bonds
Volatility may remain high in the short term, but the high yields of muni bonds now provide a strong buffer against further rate cuts if interest rates rise further.
Muni bonds can be useful in a portfolio in the opposite situation: If the economy goes into recession and interest rates go up, muni bond prices will rise (the opposite of what’s actually happening)—which can increase the bond’s total return. time. Return on equity may decrease.
We believe that muni bonds now offer excellent value for investors looking to maximize time in fixed income portfolios and seek higher returns over a multi-year period. Investors have options to implement.
Your team is JP. Morgan can help you evaluate opportunities in municipal bonds that can help you achieve your long-term goals. Read more about fixed income investing here.
Why Munis May Be Looking Better
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Reasons I Like Municipal Bonds
Investors should be aware of the potential tax liability surrounding the purchase of municipal bonds. Some municipal bonds are taxed by the state if the holder is subject to certain minimum tax rates. Capital gains, if any, are legally taxed. Investors should note that income from tax-exempt municipal bond funds may be subject to state and local taxes and the Alternative Minimum Tax (AMT).
The Bloomberg Municipal Bond Index in the U.S. Includes the dollar-denominated long-term bond market. The index has four main categories: national and local bonds with general bonds, revenue bonds, covered bonds and prepaid bonds.
The JPM Investment Grade Index (JULI) provides performance and valuation comparisons across a carefully defined universe of investment grade corporate bonds, tracking issuers, sectors and subsectors across all ratings and maturities.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure the performance of the broader domestic economy through changes in the total market value of 500 stocks representing all major industries. During the base period 1941-43 the index grew at a base rate of 10.
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Investing in fixed income products is subject to certain risks including interest rate, credit, inflation, call, prepayment and reinvestment risk.
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Are Municipal Bonds A Good Investment?
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