Notes on the Current State of the Muni Bond Market
by Annette Thau
Are you worried about your bonds (or your bond funds)?
The fixed-income markets are currently getting very bad press. No less an oracle than Warren Buffett recently dubbed bonds “instruments of mass destruction.” The perception that risk is high is primarily due to the fact that interest rates remain at historic lows. The consensus seems to be that interest rates can only go up and this creates interest rate risk: When interest rates rise, the price of a bond (or a bond fund) declines. The extent of the decline is directly related to maturity length. The other face of interest rate risk, of course, is that when interest rates decline, the price of bonds rises. Again, the extent of the increase is tied directly to maturity length.
In this article
- The Municipal Bond Market: 2010–2012
- How Safe Are Municipal Bonds?
- Buying Individual Bonds in the Current Environment
- When Does Paying a Premium Make Sense?
- Municipal Bond Funds
- Investing in Closed-End Municipal Bond Funds
- Should You Invest New Money in Bonds or Bond Funds?
- Junk Bonds
- U.S. Treasuries
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Interest rate risk affects all fixed-income securities, including Treasuries. Discussions of interest rates and interest rate risk all start with Treasury bonds. More precisely, these discussions focus on the bellwether 10-year Treasury bond, since interest rates in other sectors of the bond market typically follow Treasury rates, either up or down. If interest rates rise on Treasuries, so will those of municipal and corporate bonds.
A second factor for the current bond market worries is the constant drumbeat about the shaky finances of bond issuers—in other words, concerns about credit quality. Perception of credit risk differs for different sectors of the bond market and varies over time. Treasuries are deemed to have the highest degree of safety. Municipal bonds are next. The credit quality of corporate bonds varies widely but, on the whole, it is not nearly as high as that of municipals. Approximately 50% of all corporate bonds are now rated below investment grade—these comprise the so-called high-yield, or “junk,” bond sector.
This article focuses on the municipal bond (“muni”) market. It discusses to what extent current concerns seem justified, and it makes some suggestions about how to handle both bond funds and individual bonds.
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