Capital Ideas

Investment insights from Capital Group

Municipal Bonds
Municipal bonds can add more to core — 4 facts investors need to know

In the late innings of an equity bull market, it’s especially important to consider portfolio diversification and the role of core fixed income.

Municipal bonds are a viable option for core fixed income portfolios. Here are four facts investors need to know about the asset class:

1. Income seekers can find attractive relative value.

The after-tax income potential of municipal bonds outshines comparable taxable bonds.

Taxable-equivalent yields

2. Municipal bonds offer powerful diversification potential.

The near-zero historical correlations of municipal bonds with equities suggest their addition to equity-heavy portfolios can have a diversifying effect.

3. The market is vast, with diverse opportunities.

Puerto Rico and Illinois have been in the news for their troubles. However, revenue bonds make up a large part of the municipal market and have little connection to troubled state and local government finances. Revenue bonds are issued by entities such as hospitals and toll roads and, as the name suggests, are backed by their revenue streams.

3 of the most actively traded bonds in July 2017

4. The market's structure can favor investors with scale.

Individual investors typically have limited access to bond deals, and most bonds trade infrequently. In contrast, organizations such as Capital Group can buy and sell bonds worth millions of dollars at a time. Bond funds (or, indeed, separately managed accounts) that take a selective approach to investing can offer investors a relatively liquid and diversified way to access the asset class.

muni market snapshot

Past results are not predictive of results in future periods.

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