An Update on Municipal Bonds

Municipal bonds are popular among retirees and near-retirees as they seek to reduce market risk and position assets for a lower tax bill. One way to diversify across this sector is to invest in municipal bond mutual and exchange-traded funds. In 2021 alone, that’s where investors placed a record-high $96.8 billion of their money.

With interest rates expected to rise this year, many investors may enjoy lower municipal bond prices accompanied by higher yields. Furthermore, investors pay no federal taxes on muni bond interest and, in some cases, no state or local taxes.

Note that bonds with a shorter duration are less sensitive to interest rate hikes. However, long-term bonds tend to benefit from rising interest rates and may be a good option for retirees seeking income over a long-term horizon.

If you haven’t repositioned a portion of assets to a more conservative allocation, bonds or bond funds may be a good option for your portfolio. We’d be happy to review your financial situation to determine whether bonds are suitable for your goals and timeline. Feel free to contact us.

One reason bond prices may be attractive this year is that, moving forward, certain municipalities may need to factor in potential climate change expenses as part of their bond issuance strategy. For example, municipalities likely to be impacted by rising sea levels or a surge in wildfires may increasingly need to consider that the sources for repayment of municipal bonds are directly tied to local economic conditions. The higher the risk of climate change disasters, the more likely bond prices will increase. A recent study of this effect, however, found that the risk of default due to factors such as rising sea levels still remains statistically low.