Favorable Yields and a Source of Potential Stability for a Wider Investment Mix
On an after-tax basis, many parts of the muni market have offered relatively attractive yields. Revenue bonds — which are backed by specific revenue streams from various things such as toll roads, water and sewage plants, and airports — typically pay higher yields than general obligation bonds issued by states and local governments. Arguably, revenue bonds are the part of the market where credit research-driven active investors can potentially add most value.
Depending on an investor’s net tax burden, investment-grade (rated BBB/Baa and above) munis have recently offered after-tax yields that are meaningfully higher than those of Treasuries and comparable to yields of similarly rated corporate bonds. The yield advantage of munis compared to corporates has been even more pronounced among below-investment grade (rated BB/Ba and below) bonds.
Relative value is only one reason to consider munis. In addition to offering steady income potential, municipal bond returns have tended to have a low correlation with stock returns over time. In other words, an investment in munis may help smooth out the overall volatility of a portfolio that includes stocks, as well as corporate bonds or Treasuries.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.