How Can I Invest In Municipal Bonds? – Bonds can be a powerful tool to support your portfolio and your values Mid-Year Outlook 2023 – Recession Obsession
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How Can I Invest In Municipal Bonds?
If you own municipal bonds, you’re probably well aware that it’s been a tough year for them, as the Federal Reserve has dramatically raised interest rates. The increase in interest rates has a negative impact on the price of bonds, including muni bonds. this prompted many investors to sell, putting further pressure on bond prices.
Time To Revisit Municipal Bonds
But now it gets interesting. As prices fell, bond yields rose to their highest level in a decade. They are currently higher than other bond yields and close to annual long-term equity returns.
Furthermore, while higher yielding bonds typically require investors to accept higher default risk, most municipalities currently have extremely strong financial positions, which should mean relatively lower risk.
Bloomberg’s municipal bond index is down 12.5% this year through Nov. 7, one of the worst years in its history. However, its yield has increased from 1% to almost 4%.
More importantly, the tax-equivalent yield (how high the yield on taxable bonds must equal tax-free bonds) rose to 7%, the highest level in more than a decade.
Market Summary & Relative Value Of (municipal) Bonds
This means that muni bonds outperform the 4% yield on government bonds and the 6% yield on the JULI Investment Grade Corporate Index. Since 2000, they have even outperformed the S&P 500 index by about 6.5% per year.
You usually have to take more risk to achieve higher returns. For example, in the US, the only major fixed income asset class that yields more than muni bonds is high yield, where issuers are rated below investment grade because they have a higher risk of default.
But here is the good news. Muni bonds now not only offer higher yields, but are also a higher quality asset class. About 85% of the market is rated A or higher.
The current foundations are in extremely good condition. Thanks to federal fiscal and monetary policy support during the pandemic, municipal revenues have grown remarkably in the past two years.
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As a result, many state and local jurisdictions have been able to increase their “rainy day” funds, provide tax breaks, pay down debt or top up pensions.
In 2022, the public financial system remains stagnant for liquidity as it receives emergency aid funded by the federal governments, including the Coronavirus Relief, Relief and Economic Security Act (CARES) and the American Recovery and Retirement Plan Act (ARPA).
At the same time, housing prices and wages continued to rise, increasing municipal revenues from property taxes and wages. Tax revenues have risen an average of 18.2% this year in the 40 states that reported tax data through July.
This extremely strong financial position means that most municipal bond issuers are unlikely to miss payments, even if the economy goes into recession and causes municipal revenues to fall.
Do Not Write Off Munis: Comparing Historical Municipal Bond Returns To Stock Returns
Sources: Monthly tax reports for individual countries, 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 that the year-to-date period has been adjusted. Indices are not investment products and cannot be considered an investment. Past results are no guarantee of future results.
The graph shows the year-over-year percentage change in tax revenue in 2022 compared to 2021.
While interest rate volatility may remain high in the short term, higher muni bond yields now provide better protection against further price declines if interest rates continue to rise.
Muni bonds can also be useful in a portfolio in the opposite scenario. If the economy goes into recession and interest rates fall, muni bond prices will rise (essentially the opposite of what happened), which can simultaneously boost muni bond yields overall. when equity returns may be lower.
What Are Municipal Bonds And How Are They Used?
We believe that muni bonds now represent exceptional value for investors looking to extend the life of fixed income portfolios and provide high returns over a multi-year period. Investors have performance options.
Your J.P. The Morgan team can help you evaluate which municipal bond options can help you achieve your long-term goals. You can also learn more about fixed income investing here.
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The Tax Law Gives Municipal Bonds A New Allure
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Investors should understand the potential tax liabilities associated with purchasing municipal bonds. Certain municipal bonds are subject to federal tax if the holder is subject to the alternative minimum tax. Any capital gains are federally taxed. Investors should note that income from tax-exempt municipal bond funds may be subject to state and local taxation and the alternative minimum tax (AMT).
The Bloomberg Municipal Bond Index covers the long-term, tax-exempt bond market denominated in US dollars. The index has four main sectors: state and local bonds, income bonds, covered bonds and prepaid bonds.
The JPM Investment Grade Index (JULI) provides performance comparisons and valuation metrics across a carefully defined portfolio of investment grade corporate bonds worldwide, tracking individual issuers, sectors and sub-sectors based on their various ratings and maturities.
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The Standard and Poor’s 500 Index is an equity-weighted index of stocks of 500 stocks. The index is designed to measure the performance of the broader domestic economy through changes in the aggregate market value of 500 stocks representing all major industry sectors. The index was developed with 10 base levels for the base period 1941-43.
Investments in fixed income products are subject to certain risks, including interest rate, credit, inflation, prepayment and reinvestment risks.
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How To Purchase Municipal Bonds: 13 Steps (with Pictures)
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