Municipal Bond Management

What Is Municipal Bond Management?

Municipal bond management is the process of analyzing, investing in, and managing debt securities known as municipal bonds, or “munis.” Cities, counties, states, and other public entities issue municipal bonds to fund public projects like the construction of highways, bridges, hospitals, and schools.

Investors who purchase municipal bonds essentially lend money to the government in exchange for regular interest payments and the original investment, or “principal,” once the bond matures. These interest or coupon payments are generally issued semiannually.

Depending on your investment strategy, you can choose short-term bonds that mature in a few years or long-term bonds that may take a decade or longer to mature. Typically, municipal bonds are quoted as having a face value of $100/bond, although they are not traded in $100 increments. The minimum denomination for munis is generally $5,000, although it is possible to find them in smaller or larger amounts.

How Municipal Bonds May Potentially Fit Into Your Portfolio

For a few reasons, municipal bonds may be an excellent way to diversify your investment portfolio. Munis are among the safest and most stable investments available. Because they provide funding for essential services, they are more likely to withstand market dips and, potentially, even a recession. Once a muni matures, you can reinvest those proceeds to purchase another investment according to your needs.

The default risk for these investments is low, potentially allowing you to balance your portfolio with stocks or corporate bonds to manage market risks while progressing toward your financial objectives. Also, interest on municipal bonds is generally exempt from federal taxes (although exceptions exist.) This makes them especially attractive to individuals in higher tax brackets.

Selecting the Right Municipal Bonds

EP Wealth municipal bond managers evaluate munis to choose bonds most likely to support your long-term financial goals.

Credit Rating

Munis are partly assessed on their credit quality based on the source repaying the bond. They are paid from revenue received by the local government or the state. Or they are repaid directly from the revenue generated by the project they are funding.

Different rating agencies assign a bond’s credit rating based on the bond insurer’s credit and the likelihood that the local or state government can make payments on the bond. While creditworthiness is undoubtedly important, credit rating is not the only deciding factor. It’s possible for a muni credit rating to change since the time it was first issued.

Tax Implications

Your EP Wealth manager also considers the tax implications of different investments on your financial planning strategy. While many municipal bonds are tax-exempt, others are taxable. Some bonds are exempt from federal taxes but not local or state taxes. In some cases, interest paid on out-of-state bonds may be subject to state income tax. Guidelines vary depending on the type of bond and the state where it is issued.

Diversification

It’s also essential to understand the role of municipal bonds within your investment portfolio. They provide a relatively safe, fixed-income investment, making them appealing to investors seeking stable returns. In the big picture, munis are middle-of-the-road for risk and return and may not be sufficient to achieve financial targets. EP Wealth advisors strategically allocate assets to balance low- and medium-risk investments with stocks and mutual funds with the goal of a higher return.

 Choosing suitable investments can be daunting if you’re new to the $4 trillion municipal bond market. EP Wealth portfolio managers can help you navigate the complexities of municipal bond management and identify opportunities. Contact an advisor to get started today.