Municipal Bonds vs. Corporate Bonds

In these troubling times, should you be invested in municipal bonds or switch to corporate bonds?

I am amazed how often I find investors who purchased muni-bonds instead of corporate disregarding the fact that they were in a low tax bracket and would have yielded a higher rate on their bonds. I blame the brokerage houses most of the time as they often promote the muni’s without understanding their client’s financial situation.
 

The muni-bond market today is in sad shape, due to state budgets deficits and defaults. Federal Government economic assistance may decline and state budget problems could hinder debt payments. Add to that possible higher interest rates and bond values will continue to fall.

Municipal government income growth could suffer as well due to a weak real estate market and property tax declining. You have foreclosures and a growing list of unpaid real estate taxes. It might be several more years before we see a turn around in the real estate market.

The municipal bond market is under heavy pressure due to issuance over supply. The demand has weakened due in part to yield reaching lower levels.

Investors should stick with higher grade short-term bonds as they tend to be less volatile.

The creditworthiness of muni’s is in question as well as the fundamentals therefore expert credit analysis is required when buying the bonds; so do your own due diligence after all its your money.

In my opinion if you are not above the 28% tax bracket, then corporate bonds or corporate bond mutual funds is the wiser decision.  Considering the creditworthiness of munis right now and falling demand do you really want to be in that market?

Daniel Iuculano, AAMS CMFC

Accredited Asset Management Specialist

Chartered Mutual Fund Counselor