How To Buy Muni Bonds

How To Buy Muni Bonds

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Important Note: This website is not an offer to sell or the solicitation of an offer to purchase bonds or notes. Bonds or notes may only be purchased through a broker and through an official statement.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for tax-exempt municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds with similar maturities, credit qualities and other items.

Note that many issuers maintain websites or webpages specifically for investors in their municipal bonds. Some issuers hyperlink to those webpages from their homepage on EMMA. Learn how to find issuer homepages on EMMA.

The SEC designated EMMA as the official repository for municipal securities disclosures in 2009. The SEC oversees the MSRB. The MSRB is a self-regulatory organization whose mission is to protect investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. Neither the SEC nor the MSRB review the disclosure documents prior to their posting on EMMA.

Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest. It also can lead to higher interest rates and, in turn, lower market value for existing bonds.

Most are safe. Investors have long viewed muni bonds as safe havens. Even now, as deteriorating public finances have spurred a number of cities to file for bankruptcy, less than 0.3% of muni bonds have gone into default in the past three years, says Matt Fabian, a managing director at Municipal Market Advisors, a research firm. That said, this is not the time to throw caution to the wind, says Marilyn Cohen, president of Envision Capital Management, a Los Angeles investment firm.

Fund picks. Among open-end funds, our favorite is Fidelity Intermediate Municipal Income (symbol FLTMX (opens in new tab)). The fund, a member of the Kiplinger 25, charges 0.40% a year for expenses and yields 1.4% (yields and related data are through July 31). Among exchange-traded funds, a solid choice is Market Vectors Intermediate Muni ETF (ITM (opens in new tab)). It charges 0.24% annually and yields 2.0%. Nuveen Municipal Value (NUV (opens in new tab)) is a rare closed-end muni bond fund that does not use leverage, or borrowed money, to juice up interest payouts. However, it is more vulnerable to rising interest rates than the others because it invests in longer-term bonds. At a share price of $10.39, Nuveen yielded 4.5% and traded at a modest 3% premium to the value of its underlying assets. It charges 0.65% a year.

Municipal bonds are issued by state and local government entities to help fund the development, maintenance, and management of a public works project (think construction of schools, hospitals, essential transit, and utility systems). Issuers include states, counties, cities, school districts, universities, hospitals, utilities, airports, and many other non-federal governmental entities.

When a municipal bond is purchased, the bondholder has essentially loaned money to a public issuer in exchange for a set number of interest payments over a specified timeframe. Once the bond is called or reaches its maturity date, the investor typically receives the full amount of the original investment. The source of these interest and principal payments is what distinguishes the two main categories of municipal bonds:

Revenue bonds are often issued by public entities to fund the creation, maintenance, expansion, and ongoing management of revenue-generating projects. These can include essential-service water, sewer, and public utility systems, roadways, transit networks, and transportation hubs (such as airports). Principal and interest payments are generally paid by the revenues generated by the system or funded project.

Keep in mind that the minimum investment for municipal bonds is higher than other fixed-income assets like corporate bonds. Munis are typically issued in denominations of $5,000, whereas corporate bonds may be offered for $1,000.

Finally, while municipal bonds are generally considered low risk based on their history of strong creditworthiness, as with all investments, there are still potential risks. There is the possibility that an issuer may not pay interest and/or principal payments on a timely basis. Rising interest rates also present challenges, since all else equal, bond prices fall if interest rates rise and vice versa. Bonds with longer maturities tend to be more sensitive to interest rate risk than those with shorter ones. Also, if an investor sells their bond before maturity there is a risk they may receive an amount below purchase price or par value. This may be caused by demand, interest rates, and other factors.

To get started with bonds, visit our comprehensive Bond Resource Center. Use our Advanced Screener to quickly find the right bonds for you. Or call our Fixed Income Specialists at (866-420-0007) if you need additional help.

All bonds and fixed income products are subject to interest rate risk and you may lose money. Bonds sold by issuers with lower credit ratings may offer higher yields than bonds issued by higher rated or "investment grade" issuers, but are usually associated with higher risks. High yield bonds, also known as "junk bonds", generally have a greater risk of default, which increases the risk that an issuer may be unable to pay interest and principal on the issue. In addition, high yield bonds tend to have higher interest rate risk and liquidity risk, particularly in volatile market conditions, which makes it more difficult to sell the bonds. Before investing in high yield bonds, you should carefully consider and understand the risks associated with investing in high yield bonds.

The municipal market is volatile and can be significantly affected by tax, legislative, or political changes as well as changes to the issuer's financial condition. Interest rate increases can cause the price of a debt security to decrease. Please consult your tax advisor regarding the impact of tax-exempt investments in your portfolio.

This means muni bonds are outperforming the 4% yield for Treasuries and 6% yield for the JULI Investment Grade Corporate Index. They are even topping the close to 6.5% annualized return for the S&P 500 Index since 2000.

To get high yields, you typically have to take more risk. For example, the only major U.S. fixed income asset class yielding more than muni bonds is high yield, where issuers are rated below investment grade because they have a higher risk of default.

And current fundamentals are in particularly good shape. Boosted from federal fiscal and monetary policy support during the pandemic, municipal revenues have surprised to the upside in the past two years.

This exceptionally strong financial position means that most muni bond issuers are unlikely to default on their payments, even if the economy goes into a recession and causes municipal revenues to decline.

We believe muni bonds now offer outstanding value for investors seeking to extend duration in fixed income portfolios and to lock in elevated yields for a multi-year period. Investors have options for implementation.

The Bloomberg Municipal Bond Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded 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 sub-sectors by their various ratings and maturities.

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But in fixed income, what goes down in price must go up in yield. Nominal municipal bonds featured a yield to maturity of 2.79% as of July 31.1 That presented attractive valuations both relative to other bond sectors and from a historical perspective. In the past ten years, muni yields have only been higher 13% of the time within daily observations. With a AAA Muni yield/Treasury ratio of 97% at 30 years, tax-exempt debt is particularly attractive in the long end of the yield curve.

Depending on an investor's state and federal income tax brackets and the particular investment, the investor's tax-equivalent municipal yield may be higher than 5%. For investors in higher-tax states like California and New York, taxable-equivalent yields of corresponding state indexes may be nearly 5.75% for CA, or higher for NY. 781b155fdc