COVID-19

Muni bonds shine in a gloomy pandemic economy

Justin Ho Nov 13, 2020
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Municipal bonds, which offer tax breaks, fund public infrastructure like roads, school buildings and more. Johannes Eisele/AFP via Getty Images
COVID-19

Muni bonds shine in a gloomy pandemic economy

Justin Ho Nov 13, 2020
Heard on:
Municipal bonds, which offer tax breaks, fund public infrastructure like roads, school buildings and more. Johannes Eisele/AFP via Getty Images
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Municipal bonds fund the construction of roads, sewage systems, school buildings and power grids. Muni bonds aren’t exactly the sexiest things in the world. But right now, in this pandemic economy, they’re having a moment in the sun.

The municipal bond market is the financial backbone of three-quarters of the country’s infrastructure, said Abby Urtz, who manages municipal credit strategies for FHN Financial.

In addition to big projects like tunnels and bridges, she said, “it funds things like college dorms and nursing homes, also public transit systems.”

The vast majority of municipal bonds also have a unique feature: The interest they pay is exempt from taxes. That appeals to wealthy individual investors who buy the majority of muni bonds and have been saving more money during the pandemic, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.

“They’re also higher-end taxpayers, and so they have more to benefit, on average, from the tax exemption,” he said.

That’s not the only reason municipal bonds are in demand. They’re slightly riskier investments than Treasury bonds or corporate bonds.

Winifred Cisar, head of credit strategy at Wells Fargo, said that means “the municipal bond market continues to trade at a yield that’s pretty attractive.”

In other words, muni bonds pay higher interest. Cisar said the strong demand for them right now is a good sign for the economy.

“Historically when investors start to feel confident about seeing broader economic recovery, then they’re more willing to push their cash into riskier parts of the market.”

One index of demand for the riskiest municipal bonds has almost climbed back to its pre-pandemic level.

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