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In some cases, especially for investors in lower tax brackets, Treasurys or corporate bonds may still be the better way to go. Yet as demand drives prices higher, it will be important to consider the relative value of munis versus taxable fixed income instruments. In the portion of the portfolio devoted to bonds, investors might consider increasing the percentage of municipal bonds, especially if they’re concerned about taxes. Q: What role can they play in my portfolio?Ī: While economic recovery and growth favor portfolios weighted towards stocks, bonds remain essential for diversification, income and stability. Despite some high-profile defaults, from 1970 to 2019 the average annual default rate on an investment grade municipal bond has only been about 0.01%, according to Moody’s. At a combined 48.8%, you would need a corporate bond yielding at least 3.91% in order to earn more, after taxes, than from a tax-exempt municipal bond yielding just 2%.Īnother important benefit is low credit risk. Say you’re a taxpayer in the highest (37%) federal bracket and subject to the 3.8% Medicare surtax and 8% state and local taxes. Though their nominal yield is usually lower than for taxable bonds, they may provide a higher after-tax return.
#Municiple bond defaults free#
1Ī: While most bond interest is taxed as ordinary income, interest on municipal bonds is typically free from federal income taxes, as well as state and local taxes (generally as long as the bonds are issued in the state where the taxpayer resides). While year-to-date Treasury and corporate bond returns were down more than 3% each, the overall municipal bond index was up 0.68%. Census Bureau, and federal stimulus is promising hundreds of billions of dollars of additional support to governments, transit agencies, airports, higher education and hospitals.Īll told, municipal bonds have performed comparatively well so far in a year when bonds have generally struggled. In fact, total state and local tax revenues for 2020 rose almost 2% from 2019, according to the U.S. Moreover, their credit quality has improved after fears that last year’s pandemic-driven recession could lead many cash-strapped governments to default proved largely unfounded.
#Municiple bond defaults drivers#
One of the biggest drivers of the surge of defaults in 2020 was the “industrial development bond” category, a sector also sometimes called “industrial revenue bonds.” That category was elevated in 20 as well, reflecting two high-profile issuers, FirstEnergy and PG&E, MMA notes.Q: Why are municipal bonds performing so well?Ī: Demand has risen among investors concerned about possible tax increases, while the supply of new municipal bonds has been relatively limited. Nearly all the defaults of the past few years fall into what MMA terms a “risky” sector, also including jails, student housing, and parking. Senior living facilities are by far the biggest offender, with 27 defaults so far in 2021, followed by charter schools. Bonds issued by Puerto Rico, which is in the midst of a major restructuring process, are also excluded. It’s important to note that none of the defaults discussed here impact bonds issued by state and local governments and secured by tax revenues. That would be the highest yearly total, other than 2020, since 2016. There have been 47 defaults so far this calendar year, according to that analysis, a weekly summary of default trends from muni-market stalwarts Municipal Market Analytics, and recent history suggests the fourth quarter will see at least 13 more, putting the annual at 60. Municipal bond defaults have been on a steady climb since 2018, and look set to continue that trend in 2021, a worrisome sign given that credit conditions are likely to only worsen from here, according to an analysis published October 6. Municipal defaults are creeping up, suggesting more bondholder pain to come