MunicipalBonds.com (2024)

FAQs

How often do municipal bonds fail? ›

The Default Risk of Municipal Bonds

From 1970-2022, the default rate on munis was 0.08%. That means 99.92% of municipal bonds paid their interest and principal as agreed. That's an incredibly low default rate. By comparison, the Treasury default rate was 0%; that's the gold standard.

Cons. Market prices could tank: If interest rates go up, the market prices of existing bonds will go down. That means you could have to sell your bond at a loss. Not inflation-friendly: Municipal bonds don't hold up against inflation as well as stocks do.

We continue to have a favorable view of munis due to high attractive yields and generally favorable credit conditions. There may be bouts of volatility during the second half of the year largely due to the election.

Taxable-equivalent yield comparisons

has the highest yield. The Treasury bond has the second-lowest yield and is exempt from state and local income taxes. The California municipal bond is fully exempt from all income taxes for residents of that state.

Municipal bonds, like all bonds, pose interest rate risk. The longer the term of the bond, the greater the risk. If interest rates rise during the term of your bond, you're losing out on a better rate. This will also cause the bond you are holding to decline in value.

Thus, when interest rates rise, a bond's price usually declines because an investor can earn a higher yield with another bond. Conversely, when interest rates fall, the bond's price usually rises. Duration is a measure of how much the price changes as a result of this risk.

GO bonds are usually considered safer than revenue bonds, as a municipality can raise taxes to cover outstanding debt obligations. In contrast, revenue bonds are subject to the earnings made by that particular project.

Municipal bond gross supply is expected to total around $450 billion in 2024, up meaningfully from $330 billion in 2023. However, with approximately $400 billion of bonds maturing in 2024 and significant coupon payments, supply will likely be net neutral.

Do municipal bonds do well in a recession? ›

The short answer is bonds tend to be less volatile than stocks and often perform better during recessions than other financial assets.

The current yield is ~4.27%. An investment with $1 million par value (~$1.02 million market value with accrued interest) will generate a federally tax-exempt annual coupon cash flow of ~$43,125. According to The Bond Buyer, $7.8 billion in new issuance is expected to come to market this week.

However, municipal bonds are not without their drawbacks. They typically offer lower yields compared to corporate bonds and stocks. This means that investors may earn less income from their investments. And like all bonds, munis are subject to interest rate risk.

In contrast, unless the issuer defaults in the payment of principal, an investor that holds the bond to maturity rather than selling it in the secondary market would receive the full par amount of the bond at maturity regardless of any changes in market value.

In the event of a default, bondholders seldom lose all of their principal value of the bond. Often, a default could result in the suspension of the coupon payment. Defaulted bonds can become speculative as they can be purchased fairly cheaply.

Municipal bonds are often considered a safe investment; however, the return of principal and interest is not guaranteed. In fact, some municipal bonds, such as high yield municipal bonds, may be risky. Investors need to review the specifics of the bonds they are considering or already own to evaluate their risk.

The most infamous default cases involving general obligation bonds include New York City's default in 1975 and Cleveland in 1978. The largest default in the history of the municipal bond market was the Washington Public Power Supply System's (WPPSS) default on $2.25 billion in bonds.

The short answer is bonds tend to be less volatile than stocks and often perform better during recessions than other financial assets.

– The average recovery rate on defaulted municipal bonds has been 66% of par, compared to 42% of par for defaulted corporate bonds. General obligation (GO) and essential service revenue bonds have been particularly safe investments.