News about risk of defaults this summer prompted some investors to sell off at least some of these fixed income holdings, but that may prove to be short-sighted.
Historically, municipal bonds have not generated national headlines, but the fiscal problems facing many state and local governments have led to newsworthy concerns about the future of these securities.
Before you decide whether municipal bonds still have a place in your own portfolio, it's worth taking a closer look at the asset class, and whether they merit consideration in the current environment.
Municipal bonds are debt obligations issued by cities, counties, states and other government entities. They are used to fund projects that are considered by the municipality to be beneficial to the public good. The interest paid on municipal bonds is generally exempt from federal income taxes. Moreover, interest paid to investors who purchase a bond issued by a municipal entity located within their home state is typically exempt from state income tax.
The municipal market has changed dramatically in the past few years, due to a significant decrease in the use of insurance by municipal issuers (following the credit crisis of 2008 and 2009). You should be aware that all "muni" bonds are not created equal. Be sure that you understand all of the material terms and features of any municipal bond before you invest.
Now more than ever, you need to understand a municipal bond's credit quality and the process by which it generates income. Most issuers are graded by credit rating agencies such as Moody's, Standard & Poor's and Fitch Ratings. Each agency has a different grading system, but AAA is typically the highest rating. Lower ratings indicate that the rating agency has assessed that there is incrementally greater risk of potential default.
Keep in mind that you should not rely solely on ratings, as they are only one of several factors to consider when evaluating an investment.
Rather than shunning this asset class altogether, investors who can benefit from tax-exempt income should work with their financial advisor to determine whether certain specific municipal bonds or bond funds may be suitable for them and, if so, take a closer look at these bonds or funds as a potential investment.
Morgan Stanley Smith Barney LLC, its affiliate and financial advisors do not render advice on tax and tax accounting matters to clients.
This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. You should always consult your own legal or tax advisor for information about your situation.
Christian Nagle can be reached at 760-602-3506.
Historically, municipal bonds have not generated national headlines, but the fiscal problems facing many state and local governments have led to newsworthy concerns about the future of these securities.
Before you decide whether municipal bonds still have a place in your own portfolio, it's worth taking a closer look at the asset class, and whether they merit consideration in the current environment.
Municipal bonds are debt obligations issued by cities, counties, states and other government entities. They are used to fund projects that are considered by the municipality to be beneficial to the public good. The interest paid on municipal bonds is generally exempt from federal income taxes. Moreover, interest paid to investors who purchase a bond issued by a municipal entity located within their home state is typically exempt from state income tax.
The municipal market has changed dramatically in the past few years, due to a significant decrease in the use of insurance by municipal issuers (following the credit crisis of 2008 and 2009). You should be aware that all "muni" bonds are not created equal. Be sure that you understand all of the material terms and features of any municipal bond before you invest.
Now more than ever, you need to understand a municipal bond's credit quality and the process by which it generates income. Most issuers are graded by credit rating agencies such as Moody's, Standard & Poor's and Fitch Ratings. Each agency has a different grading system, but AAA is typically the highest rating. Lower ratings indicate that the rating agency has assessed that there is incrementally greater risk of potential default.
Keep in mind that you should not rely solely on ratings, as they are only one of several factors to consider when evaluating an investment.
Rather than shunning this asset class altogether, investors who can benefit from tax-exempt income should work with their financial advisor to determine whether certain specific municipal bonds or bond funds may be suitable for them and, if so, take a closer look at these bonds or funds as a potential investment.
Morgan Stanley Smith Barney LLC, its affiliate and financial advisors do not render advice on tax and tax accounting matters to clients.
This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. You should always consult your own legal or tax advisor for information about your situation.
Christian Nagle can be reached at 760-602-3506.