Liquidity in the muni market was strained in March as investors pulled more than $20 billion out of bond mutual funds and exchange-traded funds (ETFs) in a matter of two weeks. Want to see which stocks are moving? When an investor purchases a municipal bond they are essentially loaning money to the government in exchange for a series of interest payments to be paid on a regular schedule and a return of their original investment once the term of the bond expires. In the three calendar years in which rates rose and the Barclays Aggregate Index lost ground (1994, 1999, and 2013), municipals also finished with a negative return. The impact of these events also helps underscore the fact that there’s more to municipal bonds’ performance than simply the direction of interest rates. Interest rates affect municipal bond prices in the same way that they affect other bonds. When interest rates fall, the market price of a bond will rise and when interest rates rise, the market price of a bond will fall. “Between 1943 and 1947 the index average was 1.70%, hitting a low of 1.29% in 1946. Coronavirus has clearly upended the financial markets to a degree we still haven't wrapped our arms around.". A free source of information regarding municipal bonds can be found at the Electronic Municipal Market Access (EMMA) website from the Municipal Securities Rulemaking Board. So if a bondholder is holding a bond with a low fixed-rate value and interest rates move higher, they may lose money should they try to sell the bond before maturity could lose money because of its lower market value. In many cases, that may point to larger underlying problems. This would be similar to a homeowner who refinances their mortgage to take advantage of lower interest rates. Get daily stock ideas top-performing Wall Street analysts. Call Risk – It is possible for the bond issuer to "call" a bond which means repay the buyer their principal and all unpaid interest prior to the maturity date. In this case, the third party (known as the "conduit" borrower) repays the issuer of the bond who in turn pays the interest and principal to the bondholders. Proceeds will be used to refund all four outstanding TIFIA loan agreements. Keep in mind, however, that this isn't an apples-to-apples comparison since the interest on municipal bonds is tax-free. You can find disclosure documents which are similar to a company’s prospectus. "When you have municipal and UST yields as low as the 1940s and 50s, you cannot have to wonder where this market is headed. There are two basic types of municipal bonds. In general, the risks associated with a municipal bond are no different than with a corporate bond. While municipal bonds have credit ratings, just like other bonds, a high rating does not mean that the bondholder will not default. Even the most aggressive investors are advised to keep a small percentage of their portfolio in bonds as a way of minimizing systematic risk. Back in March, the coronavirus pandemic led to the fastest sell-off in municipals on record — only to have investors see a rebound at month-end and then a derailment again in April, said Catherine Stienstra, head of municipal bond investments at Columbia Threadneedle Investments. Make sure you're getting it all, Independent and authoritative analysis and perspective for the bond buying industry, Los Angeles County Metropolitan Transportation Authority, SEC drags Harvey, Illinois, back to court for alleged settlement violations, Munis steady as Los Angeles CCD, N.Y. MTA deals sell; Lipper sees $582M inflow, DiNapoli: NYC should explore all options before seeking bond authority, Florida revenues down 6.8% in September compared to a year ago, Next year brings more focus on financial disclosures, Why there's an urgency to use fallback language in Libor contracts, California's gas-powered vehicle phase-out puts fuel taxes on the spot, GDP rebounds in Q3, analysts see slowdown ahead, New York MTA to tap Fed program to the max. 1.80. Harvey has failed to fully implement an independent consultant's recommendations in violation of a 2014 settlement that resolved securities charges, the SEC says. What are the risks involved with municipal bonds? ... Like any bond, municipal bond rates depend on three factors. His articles have been published in The National Law Review, Mix Magazine, and other publications. If interest rates increase: An investor wishing to purchase that $1,000 bond will have to pay a premium (i.e. The most significant revenue loss in Florida continues to be the drop in sales tax collections in the tourism and hospitality industries. Bond prices and interest rates move in opposite directions. Is It Time To Add Boeing (NYSE: BA) Into Your Q4 Portfolio? But this means that investors who may be inclined to sell a municipal bond may find the market for selling is not very active, which could result in an inability to sell the bond when they would like or an inability to sell the bond for the price they desire. Government entities are not for profit operations. She said that from the Bond Buyer 20 GO Index’s inception and the onset of World War II, the average annual yield was 3.82%. What Is the Bloomberg Barclays US Aggregate Bond Index? New Jersey said it expects to issue up to $4.5 billion of tax-exempt and taxable bonds the week of Nov. 18 under the COVID-19 Emergency Bond Act. The other factor that determines the interest rate on a bond is the length of maturity. Interest Rate Risk – Municipal bonds carry a fixed-rate value (referred to as its “par” value). Citigroup is expected to price the San Diego Unified School District’s (Aa2/NR/AAA/AAA) $739.815 million of Series 2020 dedicated unlimited ad valorem property tax general obligation bonds on Thursday. PFM Financial Advisors is the financial advisor; Hogan Lovells and Steve E. Bullock are the bond counsel. If tax revenues decline, the issuer may not have the necessary funds to compensate the bondholder. Receive a free world-class investing education from MarketBeat. She said even if another shutdown were to occur, the sell-off would likely not be as swift or sharp as last time around. Johnson County, Kansas 3s of 2030 at 0.76%-0.73%. Gross domestic product surged in the third quarter's first read, but analysts suggest the rising number of coronavirus cases bodes ill for fourth quarter growth. Fracking: The Unexpected Issue That Could Determine the 2020 Election, France, Germany Impose Lockdown Measures as Coronavirus Cases Rise. This reflects a year characterized not just by recession and heightened investor risk aversion, but also by the housing market collapse. On Thursday, Miami-Dade County, Fla., will competitively sell two offerings of transit system sales surtax revenue bonds totaling $750.71 million. Let’s look at an example of how this might work with a $1,000 bond issued by Anywhere, U.S.A. (adsbygoogle = window.adsbygoogle || []).push({}); One of the benefits of municipal bonds is that the interest that investors receive from the bonds is not taxed at the federal level. Each year, Bloomberg Barclays publishes a report on individual calendar year returns for municipal bonds. What does that mean for investors? Boscov's coupon code - Extra 10-15% off any purchase, Microsoft Promo- Students and Parents save 10% at Microsoft, Walmart promo code: $10 off all departments, 10% off furniture using Home Depot coupon code, $5 off first 5 orders with Postmates coupon code, Exclusive Doordash promo code: 15% off first order, Video of Walter Wallace Police Shooting Sparks Protests in Philadelphia. Are we in store for negative yields on the short end? Similarly, municipals underperformed in years characterized by big financial news headlines: 1994 (the Orange Country, CA bankruptcy), 2010 (Meredith Whitney’s prediction of a “wave of defaults”), and 2013 (Detroit’s bankruptcy and Puerto Rico’s financial troubles). 30 Year. Learn everything you need to know about successful options trading with this three-part video course. 2.00. The deal consists of $267.645 million of Election of 2012 Series M-2 GOs and $472.17 million of Election of 2018 Series D-2 GOs. For reprint and licensing requests for this article. Liquidity Risk – Many bondholders buy municipal bonds to hold them rather than to trade them. When the bond is issued, interest rates are at 2.5%. Historically, taxable bonds have made up only about 10% of the muni market, but recently taxable bonds have accounted for as much as 25% new muni issuance. The Port of Houston 4s of 2037at 1.16%-1.30%. The most common types of risk are default risk, call risk, interest rate risk, inflation risk, and liquidity risk. 326 E 8th St #105, Sioux Falls, SD 57103 | [email protected] | (844) 978-6257 Bonds of all types have a common language. The Bond Buyer. This is similar to what consumers experience when they seek a bank loan. By unsecured, it means they are not backed by hard assets, rather they are backed by the “full faith and credit” of the bond issuer. a price higher than the bond’s par value). Add the municipal market to the long list of American institutions reshaped by Covid-19. How is a bond’s interest rate determined? However, it is fair to say this risk is not necessarily greater or worse than the risk presented by corporate bonds. The 10-year maturity was off one basis point to 0.561% and the 30-year dropped one basis point to 1.301%. Inflation Risk – The risk here is similar to the interest rate risk since inflation generally results in higher interest rates, which lowers the market value of a bond. It's often stated that bonds provide the lower-risk returns appropriate for conservative investors and those nearing or already in retirement. The yield on the 10-year muni remained at 0.58% while the 30-year yield stayed at 1.27%. All rights reserved. A general obligation bond is an unsecured bond that is issued by a state, city, or county. Sign up for MarketBeat All Access to gain access to MarketBeat's full suite of research tools: Investing in bonds is one part of a balanced and diversified portfolio. ICE reported the 10-year muni-to-Treasury ratio stood at 102% while the 30-year ratio was also at 102%. However, another risk with inflation is that the purchasing power of the interest they receive will now be reduced as inflation raises consumer prices. Similarly, bond investors who began investing in the post-financial-meltdown area that began in 2007 have suffered nearly a decade of extremely low returns. The results for the past 25 years are shown in the Bloomberg Barclays Municipal Bond Index table below. Yields on the AAA GO scales were steady to down as much as one basis point, continuing to entice issuers with record low rates. Information is provided 'as-is' and solely for informational purposes, not for trading purposes or advice, and is delayed. Bonds can be short-term, which are typically one to three years or long-term, which can have maturities of over 10 years.