Muni Bond Issuance Explained with Market Trends

Muni bond issuance can seem complex, but it's actually a straightforward process. Municipalities issue bonds to raise capital for various projects, such as infrastructure development and public services.

The total value of muni bond issuance has been steadily increasing over the years. In 2020, the total value of muni bond issuance reached $529 billion.

Municipalities can issue different types of muni bonds, including general obligation bonds and revenue bonds. These types of bonds have varying levels of credit risk and returns.

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A bond is essentially a type of loan where you, as the investor, lend money to a government entity, such as a local or state government, in exchange for interest on your principal balance.

Municipal bonds act like loans, with bondholders becoming creditors.

The government entity repays the principal balance, along with interest, by the maturity date.

On a similar theme: List of Government Bonds

Municipal bonds come in various types, each with its own characteristics and benefits. A general obligation bond (GO) is issued by governmental entities and not backed by revenue from a specific project, such as a toll road.

General obligation bonds offer principal and interest secured by the full faith and credit of the issuer and usually supported by the issuer’s taxing power. They are backed by dedicated property taxes or general funds.

Revenue bonds, on the other hand, secure principal and interest payments through the issuer or via sales, fuel, hotel occupancy, or other taxes. Some revenue bonds are backed by a third party that covers interest and principal payments.

Here are the main types of municipal bonds:

Revenue bonds are not backed by the full faith and credit of the issuer, but rather by particular streams of revenue such as tolls, charges, or rents paid by users of the facility built with bond proceeds.

Municipal bonds come in different types, each with its own characteristics. There are three main types: general obligation bonds, revenue bonds, and insured bonds.

General obligation bonds are issued by governmental entities and are not backed by revenue from a specific project. They can be backed by dedicated property taxes or payable from general funds.

On a similar theme: Types of Insurance Bonds

Revenue bonds secure principal and interest payments through the issuer or via sales, fuel, hotel occupancy, or other taxes. A third party may cover interest and principal payments when a municipality is a conduit issuer of bonds.

Insured bonds are backed by a guarantee from a municipal bond insurer. The insurer promises to make timely payments of interest and principal when due, subject to their ability to pay claims. It's essential to consider the credit rating of both the insurer and the underlying issuer before buying an insured municipal bond.

Here's a breakdown of the three types of municipal bonds:

Municipal bonds are available in a variety of terms ranging from two to 30 years. This flexibility allows investors to choose a term length that suits their financial goals and risk tolerance.

Some investors may prefer shorter terms to minimize their investment duration and potential market volatility. Two-year terms are a popular option for those who want to invest for a short period.

On the other hand, longer terms can provide more significant returns for investors who are willing to hold onto their bonds for an extended period. Thirty-year terms are available for those who want to invest for the long haul.

Credit rating plays a significant role in determining the quality and risk associated with municipal bonds. Many agencies, such as Moody's Investors Service and Standard & Poor's Corporation, rate these bonds based on the issuer's financial condition and credit history.

Moody's and S&P have different rating scales, but they both aim to provide a clear indication of the bond's creditworthiness. On Moody's scale, issues rated Baa3 or above are generally considered investment-grade, while those rated lower than Baa3 are considered below investment-grade.

Investment-grade bonds are considered to be of lower risk, while those rated below investment-grade carry a greater degree of risk. It's essential to understand the credit rating of a bond to make informed investment decisions.

Here's a comparison of the Moody's and S&P rating scales:

The municipal bond market is well positioned to begin the fourth quarter, with supply likely to ease while demand strengthens.

Supply increased meaningfully during the second and third quarters, but deals have been routinely oversubscribed, pointing to improved performance potential.

Historically elevated yields, nearly 100 basis points above the trailing 10-year average, offer attractive total returns from income alone.

Investors may enjoy attractive taxable-equivalent yield opportunities, as higher yields amplify the tax-exempt nature of municipal bonds.

Take a look at this: State and Municipal Bonds

The value of municipal bonds outstanding as of Q4 2023 is a staggering $4.1 trillion. This massive figure highlights the significant role municipal bonds play in the bond market.

As of Q4 2023, the value of municipal bonds outstanding is a substantial $4.1 trillion. This number underscores the importance of municipal bonds in the financial landscape.

Municipal bonds are a crucial part of the bond market, with $4.1 trillion outstanding as of Q4 2023.

A unique perspective: Bearer Bonds Value

The supply surge is ending, and that's good news for investors. Issuers brought deals that had been long delayed due to execution uncertainty, but now supply is likely to taper after the election.

Deals have been routinely oversubscribed, indicating insatiable demand for municipal bonds. This points to improved performance potential once supply eases.

Yields remain historically elevated, at nearly 100 basis points above the trailing 10-year average. Investors may enjoy attractive total returns from income alone.

The yield curve should steepen more meaningfully as the Fed continues to cut rates. This environment should be positive for longer-duration bonds.

Liquidity can be a challenge when selling municipal bonds prior to maturity. Vanguard Brokerage Services doesn't make a market in municipal bonds.

You'll need to rely on an active secondary over-the-counter market for many municipal bonds, which can provide a way to sell your bonds. Liquidity will vary depending on a bond's features.

For example, bonds with higher ratings or credit quality may be easier to sell. Lot size also plays a role in liquidity, with larger lots potentially being more difficult to sell.

Market conditions can also impact liquidity, making it harder to sell bonds during times of low market activity.

A fresh viewpoint: Bond Market

Municipal bonds offer stability for your capital with low default rates, making them a relatively safe investment.

They also provide tax-free income for qualified residents, which can be a significant advantage for those in high tax brackets.

Municipal bonds pay lower coupon (interest) rates compared with taxable bonds, but the tax-free income can make up for this difference.

Interest from munis is generally exempt from federal taxes, which can increase your overall return on investment.

Broaden your view: Are Muni Bonds a Good Investment

Municipal bonds offer stability for your capital with low default rates, making them a relatively safe investment option.

Interest from municipal bonds is generally exempt from federal taxes, which can be a big plus for investors who are looking to minimize their tax liability.

Lower interest rates may be a drawback for some investors, but municipal bonds often have lower interest rates than riskier investments like corporate bonds or stocks.

For another approach, see: Aaa Muni Bond Rates

Investing in bonds can be a smart move, but it's essential to understand the potential risks involved.

Interest rate risk can be a significant concern, especially if you've invested in bonds with lower yields.

Bonds with longer maturities are generally more sensitive to changes in interest rates.

Inflation can also erode the purchasing power of your bond returns, making it harder to achieve your financial goals.

A sharp decline in the creditworthiness of the borrower can lead to a default, resulting in a loss of principal.

Credit risk is a major concern for investors, particularly if they've invested in bonds with lower credit ratings.

Liquidity risk can be a problem if you need to sell your bonds quickly, but there aren't many buyers in the market.

As a general rule, bonds with shorter maturities tend to be more liquid than those with longer maturities.

Taxability can be a bit tricky with municipal bonds. Interest income on munis is generally exempt from federal taxes and from state taxes in the state of issuance.

However, there are some exceptions. Interest on certain private activity bonds may be subject to the Alternative Minimum Tax (AMT). This means that even though the interest is tax-free at the federal level, it can still be subject to the AMT.

Some municipal bonds, like Build America Bonds, are taxable municipal bonds. These bonds were issued in 2009 and 2010 to create and repair infrastructure, and provide a subsidy to issuers from the federal government of 35% on their interest costs.

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Additionally, municipal bonds purchased at a discount may subject investors to capital gains taxes when sold or redeemed. It's essential to consult a tax professional for additional information on how taxability affects your investment.

Here's a quick rundown of taxability with municipal bonds:

Municipal bonds are typically issued for public projects like constructing schools, hospitals, and highways.

Municipal bonds can be issued by nonprofit organizations, private-sector corporations, or other public entities.

A key consideration is that municipal bonds pay lower coupon rates compared to taxable bonds.

This is because the interest from munis is generally exempt from federal taxes, which can be a major draw for investors.

Low default rates make municipal bonds a stable option for capital preservation.

Municipal bonds offer a unique combination of stability and tax benefits, making them an attractive investment opportunity.

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