municipal bond market is perhaps best known for its federal tax exemption on individuals and its low default rate relative to other fixed-income securities. This post describes the market and its risks. But the municipal bond market is complex and defaults happen much more frequently than most casual observers are aware. The last couple of years have witnessed threatened or actual defaults in a diversity of places, ranging from Jefferson County, Alabama, to Harrisburg, Pennsylvania, to Stockton, California.īut do these events point to a wave of future defaults by municipal borrowers? History—at least the history that most of us know—would seem to say no. In our recent post on the state and local sector, we argued that structural problems in state and local budgets were exacerbated by the recession and would likely restrain the sector’s growth for years to come. federal, state or local taxes.Jason Appleson, Eric Parsons, and Andrew F. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. Neither they nor Summit provide tax or legal advice to clients. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Summit is not responsible for the information contained on third-party websites.
Links to third-party websites are provided for your convenience and informational purposes only. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Past performance is not a guarantee of future results.
Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. This material is for your information and guidance and is not intended as legal or tax advice.
#Muni bond defaults 2020 how to#
If you are unsure, I advise in speaking with a professional.įor more information on how to invest in municipal bonds or for a complimentary investment review of your portfolio, please email me at advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. There are pros and cons to each approach. There are short-, intermediate- and long-term as well as different types of municipal bonds, such as general obligation and revenue bonds. There are many ways to purchase municipal bonds, including buying a bond fund, multiple different bond funds or individual bonds. However, given the reasons listed above, I think municipal bonds can help as part of a diversified portfolio. Municipal bonds have their advantages and disadvantages and are not suitable for all investors. Muni bonds are by no means risk-free, but the low risk of default is comforting for my conservative clients.
Even during the Covid pandemic up through 2020, according to investment firm VanEck, there were only two municipal bond defaults, and neither were virus related. Municipal Bond Defaults and Recoveries (opens in new tab) snapshot, from 1970-2020 the default rate – when a bond fails to make interest or principal payments – remains “rare” overall for municipal bonds, at 0.08% over the course of the study. Reason #3 to like munis: Low default risksĪccording to Moody’s Investor Service’s annual U.S. Past performance is no guarantee of future results, but strong performance has typically followed large outflows in municipal bond funds. Research from investment firm Lord Abbett looking back over the past 12 years has shown there have been six distinct outflow cycles for muni bonds, and in the subsequent 12-month period the performance was overwhelmingly positive.
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