If your main investment goal is to keep your money safe and make money that isn't taxed, you should consider municipal bonds. "Munis," which stands for "municipal bonds," are debts that governments give out. When you buy a municipal bond, you give the issuer a loan for a set number of interest payments over time. At the last time, the bond touches its expiry date, and you get back the whole amount you put into it. General obligation bonds cover costs immediately, while revenue bonds are used to pay for infrastructure projects. The interest rates and payouts on some municipal bonds are higher. Find out how these bonds have been done in the past so you can decide if they are an excellent place to put your money. It would be best if you also looked into the risks of these kinds of investments.
Risk of Interest Rates on Municipal Bonds
Municipal bonds are the same as the rest of the bond market regarding the risk of interest rates going up. Once the Barclays (now Bloomberg) Aggregate Index went down in 2013, 1999, and1994, rates went up in two years. In all three cases, municipals ended up with a bad return. On the other side, such type of bonds provided a good return in 22 of the 23 years when the bond market was neutral or positive at the end of the year. Even though municipal bonds may go up and down more than many other fixed-income investments, they are still part of the bond market.
The Credit Risk Of Municipal Bonds
Credit risk can also affect how much money you get back from municipal bonds. The chance that a bond won't pay back its debt is called "credit risk." It looks at the bigger things that can change how defaults will turn out. For example, when the economy gets worse, the risk of default goes up. This can be bad for bonds whose risk of default depends on how well they do. Municipal bonds can be made by states, big cities, small towns, and other groups. Because of this, credit risk can also affect how they do things. In 2008, rates went down, and the bond market went up by more than 5%, but municipal bonds went down. This shows that 2008 was the beginning of a recession.
At that time, investors tried to avoid taking risks with their money. When the housing market crashed, cities and other groups got less tax money from the government. At that point, people started to worry that more people might stop paying their bills. Municipals also did not do well in 1994, 2010, and 2013. There was a lot of news about money during these years. The effects of these things also show that the performance of municipal bonds depends on more than just the direction of interest rates. Over the long term, the returns on municipal bonds have been close to those on the investment-grade market. Remember that this comparison is unfair because the interest on municipal bonds is not taxed.
Buying Strategies
The easiest way to invest in municipal bonds is to buy one with a reasonable interest rate (called a "yield") and keep it until it matures. The next step up in terms of complexity is making a municipal bond ladder. Each bond in a ladder has a different interest rate and date when it will be paid off. As each step on the ladder comes due, the money is put into a new bond. Both are considered passive strategies because the bonds are bought and kept until they mature.
Investors who want their bond portfolio to bring in income and go up in value can choose active portfolio management, in which bonds are bought and sold instead of being held until maturity. With this method, you try to make money from yields and capital gains, which happen when you sell something for more than you bought it for.
In Conclusion
People often say that bonds give low-risk returns to conservative investors and people close to or in retirement. The above table also shows that bonds are not risk-free since the difference between the best and worst years is almost 20 points. They go up and down less than stocks, but there is still a chance that they will move in strange ways. And just like with stocks, it's essential when you start to invest.
