Municipal Bonds: Volatility Is Creating A Potential Opportunity, But Choose Carefully

The bottom line

To be sure, we are entering an unknown period of economic stress, and appropriate caution should be exercised. But there are signs that the precipitous market sell-off may have been overdone for municipals driven by illiquidity, which the Fed is rushing to remedy. While municipal bonds are at attractive entry levels, it’s important to remember that they have historically been a safer alternative with much lower default rates versus corporate bonds—plus the multi-trillion dollar government stimulus package will very likely directly support dedicated segments of the muni market. During this time of opportunity, it is important to navigate media headlines objectively, resist scare-mongering and not let fear lock up our ability to make informed investment decisions and take advantage of rare opportunities. 

1,2 Source: Morningstar Direct
U.S. Municipal Bonds: Morningstar broad category ‘US Municipal’ which includes mutual funds and ETFs (and multiple share classes). 2020 YTD Flows as of 3/20 – which only includes funds that report daily flow data.
Source: Moodys
5Source: S&P. For municipal defaults, S&P’s study period was Jan. 1, 1986, to Jan. 1, 2019. For corporate defaults, S&P’s study period was Jan. 1, 1981 to Jan. 1, 2019. The calculation represents a 15-year cumulative default rate.
S&P’s study calculations include all ratings in the C category, from CCC to C.

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Quantitative easing (QE), also known as large-scale asset purchases, is a monetary policy whereby a central bank purchases government securities or other securities from the market ...

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