Municipal Bonds Vs. Money Market Funds (2022)

Investors seek out government bonds because they tend to be low-risk and stable investments.

The primary difference between municipal bonds, also known as "munis," and money market funds is that municipal bonds are single bond issues from local or state governments,while money market funds are a type of mutual fund that invests in very-short term Treasuries issued by the federal government.

(Video) Bond Basics 1: What is a Money Market Fund?

Key Takeaways

  • Governments issue debt in the form of bonds in order to raise funds for projects and expenditures.
  • The federal government issues Treasuries, where money market funds invest in very short-duration Treasuries that are essentially risk-free but carry very low yields.
  • Municipal bonds are issued by state or local governments and carry a higher degree of risk, but they can also be income-tax exempt making them attractive to certain investors.
(Video) Money Market Funds: What You Need to Know

Municipal Bonds

Municipal bonds refer to debt that is issued by state or local governments to finance capital expenditures. When you buy a municipal bond, you are loaning money to the municipality, which agrees to pay you back with interest. These governments use the money raised by muni bond issues to fund projects which are then repaid to creditors through revenue generated by that project (e.g. a toll road), or else by taxing its citizens.

(Video) How To Invest in Municipal Bonds? How Do they Work, Types, Pros & Cons: Full Guide For Investors

Income from these bonds is usually tax-exempt at the federal, state and local levels, making it attractive to investors seeking to lower their taxable income. As a result, they tend to have lower yields than a taxable equivalent bond. Munis also may have lower yields because these bonds are issued by government entities that can tax their citizens. These governments, however, cannot print money or issue Treasuries like the federal government, and are therefore more risky than bonds issued by the federal government. Indeed, municipalities and even states have defaulted on their municipal bond issues in the past.

Money Market Funds

Money market funds are fixed income mutual funds that invest in high-quality federal government debt securities, usually with very short maturities and low credit risk. Money market mutual funds are among the lowest-volatility types of investments. Income generated by a money market fund is either taxable or tax-exempt, depending on the types of securities the fund invests in.

(Video) The Tax Benefits of Municipal Bonds

There are some money market funds that are primarily invested in municipal bonds, thus creating municipal money market funds. These funds bring together the tax benefits of municipal bonds with the stability, liquidity and diversification qualities of money market funds. All of these benefits tend to attract high-income investors seeking a tax shelter.

Their Risks


One of the major risks associated with municipal bonds is the possibility that short-term yields will rise. This means other bonds coming on the market will pay a higher rate to bond owners,and yourbond will be seen as less valuable. This can cause the price of your bond to drop. This is only a problem if you decide to sell the bond. You will still receive your interest payments.

(Video) Individual Bonds vs. Bond Funds: What’s the Difference?

Another risk isthat municipalbond returns may not keep pace with inflation. If inflation rises, your bond yield will stay the same. Eventually, you may be making less in interest than the inflation rate. If inflation is at 5% and you are earning 3%, you are losing money. Your interest income won't have as much buying power. Though extremely rare, default is also a risk to investors in municipal bonds.

Money Market Funds

Thisis one of the safest investments you can find. These funds very rarely lose value, and the interest they pay is reliable. Because of this safety, they also pay very low interest. Risk and reward are always related: Lower risk means lower reward.

(Video) Pluses and Minuses to High-Yield Municipal Bonds

The Bottom Line

If you are investing for income, either municipal bonds or money market funds will pay you interest. Just know that bonds can lose value and money market funds most likely won't. Note also that since municipal bonds are income-tax free, you are actually making more than the interest rate would indicate. You can factor in your tax savings as part of the value of buying such a bond.


Municipal Bonds Vs. Money Market Funds? ›

The primary difference between municipal bonds, also known as "munis," and money market funds is that municipal bonds are single bond issues from local or state governments, while money market funds are a type of mutual fund that invests in very-short term Treasuries issued by the federal government.

Are bonds better than money market? ›

Short-term bonds typically yield higher interest rates than money market funds, so the potential to earn more income over time is greater. Overall, short-term bonds appear to be a better investment than money market funds.

What are the disadvantages of municipal bonds? ›

The only real disadvantage of municipal bonds is that they carry relatively low interest rates compared to other types of securities. This is particularly true when the economy is strong and interest rates for Treasury bills and CDs rise.

Is a municipal bond fund a good investment? ›

Investing in municipal bonds is a good way to preserve capital while generating interest. Most of them are exempt from federal taxes, and some are tax-free at the state and local level as well. 1 Municipal bonds, also called munis, help build infrastructure in your area.

What is the average rate of return on municipal bonds? ›

The first four funds all fall under Morningstar's “High Yield Muni” category, which had an average total return of 6.0% over the past year. The last fund belongs to the “Muni National Intermediate” category, which provided a total return of 1.9% over the same period. All data below is as of Dec. 10, 2021.

Can you lose money in municipal bonds? ›

The Bottom Line. If you are investing for income, either municipal bonds or money market funds will pay you interest. Just know that bonds can lose value and money market funds most likely won't. Note also that since municipal bonds are income-tax free, you are actually making more than the interest rate would indicate ...

How safe are municipal bonds now? ›

Muni bonds may offer security and tax-free portfolio income with relatively low default risk. These assets typically pay off for investors in higher tax brackets versus lower-income retirees. However, it can be tricky to manage individual muni bonds due to interest rate and credit risks, financial experts say.

Are municipal bonds a good investment 2022? ›

Reason #2 to like munis: Be greedy when others are fearful

So far 2022 has not been kind to municipal bonds. As of April 12, 2022, the S&P Municipal Bond Index is down 6.78% for the year. Investors may have been spooked by events in Ukraine, inflation and the prospect for higher interest rates. This is reason No.

Are municipal bonds a good investment in 2020? ›

On the plus side, highly-rated municipal bonds are generally very safe investments compared to almost any other investment. The default rate is tiny. As with any bond, there is interest rate risk. If your money is tied up for 10 or 20 years and interest rates rise, you'll be stuck with a poor performer.

Why are municipal bonds bad? ›

While default risk is low, muni bonds are subject to interest rate risk, or the risk that rising rates will lead to falling prices. This is even more true for investors in bond funds and exchange-traded funds (ETFs) that invest in munis.

Why are municipal bonds dropping? ›

States and cities have been forced to cut prices to sell their bonds to banks and insurance companies because muni bond funds are no longer offering top dollar, dealers said.

Why are municipal bonds attractive to investors? ›

Investors in all but the lowest tax bracket would have received higher after-tax returns from municipal bonds. Because municipal bonds seek to provide tax-free income, they have generally offered higher tax-equivalent yields than their taxable counterparts.

What is the current interest rate on municipal bonds? ›


What percentage of portfolio should be in municipal bonds? ›

Asset Allocation and Diversification Generally

One common approach is to allocate 50% of your portfolio to stocks, 40% to bonds, and 10% to cash. Diversification involves spreading your investments among different investment products, including within each of your portfolio's asset categories.

What are the safest municipal bonds? ›

Pre-refunded munis backed by U.S. Treasuries are the safest munis available.

What are the highest yielding municipal bonds? ›


However, investors need to be aware that short-term bond funds carry a higher degree of risk and cannot always be used as a money market fund substitute.. The limited amount of time until maturity means that interest rate risk —or the risk that rising interest rates will cause the value of the fund’s principal value to decline—is low compared to intermediate- and long-term bond funds .. Since short-term bond funds tend to be lower risk, many investors use the funds as a higher-yielding alternative to money market funds.. While short-term bond funds have low interest rate risk , they can have other types of risk depending on the securities they hold in their portfolios. Many funds invest in high-quality corporate bonds or mortgage-backed securities , but this isn’t always the case.. If you need to use the money within a year or have an extremely low tolerance for risk , money market funds are the better option.. In addition to mutual funds such as Vanguard Short-Term Bond Index Fund Admiral Shares (VBIRX), T. Rowe Price Short-Term Bond Fund (PRWBX), and Lord Abbett Short Duration Income Fund Class A (LALDX), there are a growing number of exchange-traded funds (ETFs) that focus on the sector.. Many short-term bond mutual funds offer check-writing privileges, as money market funds do, while ETFs do not.. Government bonds refer specifically to bonds issued by governments rather than corporate entities.. When interest rates go up, investors can get paid more interest by buying new bonds, and they won't want to pay the same price for an older bond that is offering lower interest payments.. However, if that bond still has 30 years of payments left, then small interest rate changes could add up to significant gains or losses.. If you instead choose fixed-income options with higher interest rates, then you are taking on additional risk to your principal investment.

Money market accounts earn interest like savings accounts.. Speak with your financial institution before opening a money market account to confirm your financial institution’s transaction limits and fees to ensure that a money market account meets your needs for access to funds.. Money market mutual funds, also known as money market funds , are investment products that allow consumers to earn interest in a lower-risk environment than the stock market.. Here’s how money market funds compare to money market accounts:. There will usually be a transfer time between making the withdrawal from the money market fund and having funds arrive in their bank account.. If you don’t anticipate needing immediate access to your savings since you’ll likely have to transfer funds from your money market fund to your bank account.. If you don’t mind bearing a little risk in exchange for the higher potential rate of return—money market funds aren’t FDIC or NCUA insured and could incur a loss.. Money market accounts are generally best for those who want to earn interest and easy access to their funds with features like a debit card and check-writing privileges.

You have a choice between investing in general corporate bonds or tax-free municipal bonds .. The corporate bonds yield 7%, and the tax-free municipal bonds yield 5%.. The tax-free municipal bonds, on the other hand, would generate $25,000 per year in interest income.. Even if you are in the highest tax bracket levied in the United States, the income within your 401(k) plan or other retirement accounts is already shielded from the IRS, making corporate bond yields a better choice from a taxation perspective in most situations.. Depending upon the duration of the municipal bonds you hold in your investment portfolio, your assets may fluctuate more or less than stocks .. When you buy a municipal bond in the primary market, your money is lent to a local or state government for projects that make life better for the average person.. In all of these cases, the bond issuer promises to pay you interest on your money.. Some brokerages offer access to newly issued municipal bonds that are bought directly from the issuing entity .. Some of these bond funds focus on specific states so that investors can match their investments with where they live.

Expense Ratio The Vanguard Federal Money Market Fund is a relatively accessible money market option that invests at least 99.5% of its total assets in cash, U.S. government securities or repurchase agreements that are collateralized solely by U.S. government securities or cash.. Minimum Expense Ratio The Invesco Government Money Market Fund holds at least 99.5% of its total assets in cash, government securities, and repurchase agreements collateralized by cash or government securities.. In addition, a minimum of 80% of net assets are invested in government securities and/or repurchase agreements that are collateralized by government securities.. Minimum Expense Ratio The Northern Trust U.S. Government Money Market Fund holds U.S. government and agency securities and repurchase agreements for income consistent with relatively low risk.. Low investment minimums make these funds accessible to any investor, and decent yields, low risk and affordable expense ratios are all important factors.. Even though money market funds are paying more, inflation erodes real returns—on all investments, not just money market funds.

Municipal bonds and mutual funds are some of the safest investments today, with the former boasting historically low default risks and the latter mitigating risk through diversification.. How investors make money with mutual funds and municipal bonds How returns from mutual funds and municipal bonds are taxed Investment liquidity with mutual funds and municipal bonds Minimum investment required with mutual funds and municipal bonds. To help you distinguish between mutual funds and municipal bonds, this article will focus on the practical differences between these investments and provide a basic overview of what they are.. Mutual funds are investment vehicles that pool money from various investors and invest it in various securities that may include bonds, stocks, and short-term debt.. Thus, the holdings of a mutual fund may include municipal bonds, possibly alongside other securities.. Mutual Funds provide more ways to earn money than municipal bonds.. Capital gains distributions : If a mutual fund sells securities that have gained value, capital gains arise.. Generally, there are more tax exemptions for a municipal bond investor than a mutual fund investor.. Additionally, shareholders of a mutual fund may be required to pay taxes on transactions executed by the fund on their behalf.. To shed more light on the various types of taxes a mutual fund investor is obligated to pay, here’s a table summarizing how the IRS treats the various income types: Distribution Type DescriptionFederal Tax TreatmentLong-term capital gainsNet gains you realize after selling shares you’ve held for more than a year.Taxable at capital gains rates, which are typically lower than those of ordinary income.Short-term capital gainsNet gains realized from selling shares held for no longer than a year.Often recognized as ordinary dividends and subject to ordinary rates for income taxes.Qualified dividendsDividends realized from common stock of all domestic companies eligible foreign organizations.Typically treated the same as long-term capital gains.. Some hedging and holding period restrictions may apply.Ordinary/non-qualified dividendsAll taxable investment income, excluding long-term capital gains.Subject to ordinary income rates.Tax-exempt interestAll or part of the interest on specific bonds such as municipal bonds and state bonds.. However, local or state taxes may apply depending on the bond type and where you live.Taxable interestInterest on all fixed-income securities.Subject to ordinary income rates.Federal interestInterest paid on federal debt securities.Ordinary federal income tax rates apply.. Mutual funds are more liquid than municipal bonds.. Generally, buying shares of a mutual fund requires less initial capital than a municipal bond.. Recapping, mutual funds differ from municipal bonds in terms of:

Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money.. Investing disclosure: The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice.. Bankrate follows a strict editorial policy , so you can trust that our content is honest and accurate.. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision.

By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future.. Given the tax benefits, the interest rate for tax-exempt municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds with similar maturities, credit qualities and other items.. Call risk refers to the potential for an issuer to repay a bond before its maturity date, something that an issuer may do if interest rates decline -- much as a homeowner might refinance a mortgage loan to benefit from lower interest rates.. Many municipal bonds are “callable,” so investors who want to hold a municipal bond to maturity should research the bond’s call provisions before making a purchase.. Credit ratings seek to estimate the relative credit risk of a bond as compared with other bonds, although a high rating does not reflect a prediction that the bond has no chance of defaulting.. The bond’s market price will move up as interest rates move down and it will decline as interest rates rise, so that the market value of the bond may be more or less than the par value.. This refers to the risk that investors won’t find an active market for the municipal bond, potentially preventing them from buying or selling when they want and obtaining a certain price for the bond.. Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ.

Here's what you need to know about investing in municipal bonds.. Between 1970 and 2015, only 99 muni bond defaults were issued.. Municipal bonds have been 50 to 100 times less likely to default than corporate bonds.. If interest rates go up while you still own a particular muni bond, you will earn a lower yield than you'd be able to get from a new issue in the future.. Generally, the higher an issuer's credit rating, the lower the interest rate its bonds pay.

Portfolios that are appropriately positioned should benefit from the rise in spreads and yields over time (a spread is the difference in yield between two bonds of comparable maturity, and reflects the additional compensation investors require to own a security relative to a highly rated alternative, such as a U.S. Treasury bond).. As a result, credit concerns ebbed and prices on muni bonds didn’t fall as much as other fixed income sectors, resulting in munis outperforming most other highly rated fixed income sectors.. Bloomberg High Yield Municipal Bond Index ("High yield municipal bonds"), Bloomberg US Treasury Inflation Notes Index (“TIPS”), Bloomberg U.S. Corporate High-Yield Bond Index (“High-yield corporate bonds”), S&P/LSTA Leveraged Loan Index (“Bank loans”), ICE BofA Fixed Rate Preferred Securities Index (“Preferred securities”), Bloomberg Municipal Bond Index (“Municipal bonds”), Bloomberg Municipal Index Taxable Bonds ("Taxable municipal bonds"), Bloomberg U.S. Securitized: MBS/ABS/CMBS and Covered Index (“ Securitized bonds”), Bloomberg US Corporate Bond Index ("Corporate bonds"), Bloomberg US Agg Agency Index (“Agency bonds”), Bloomberg US Aggregate Bond Index ("Core bonds"), Bloomberg US Treasury Index ("Treasury bonds”).. This made it difficult for muni investors, because even after considering the effect of taxes, Treasuries and other highly rated investments often yielded more than munis, even for investors in the highest tax bracket.. The muni market responded to the prospect of higher taxes with yields moving lower relative to taxable alternatives as illustrated by the change in the “breakeven” tax rate.. The “breakeven” tax rate is the tax rate at which a municipal bond will yield more than a corporate bond before adjusting for taxes.. As illustrated in the chart below, this rate is currently 47.1%, meaning if an investor’s combined tax rate (federal, state, local, and other applicable taxes) is above 47.5%, munis yield more than corporate bonds after taxes.. Since taxes may not rise as much as originally proposed, we would expect muni yields to rise and the breakeven tax rate to fall.. The “breakeven” rate is the tax rate that makes the after-tax yield for the corporate bond index equivalent to the yield for the municipal bond index.

If you were to invest in U.S. government bonds or corporate bonds, you would be paying Federal income tax on the interest you earn on these bonds.. This is because the municipal bond yields tend to be lower than other bonds but since you don’t pay taxes on munis, you might come out ahead.. You would need to invest in a 4% taxable bond to get the same return as a 3% tax exempt bond.. In most cases, muni bonds are tax-exempt from state taxes if the investor buys bonds issued from their state.. And if you invest in muni bond funds or municipal bond ETFs, the selling process is even easier.. Low Default Risk Compared to corporate bonds, municipal bonds are a low risk investment.. If municipal bond investors are looking to buy a bond, are they more likely to buy the one that is paying them 5% interest or 10% interest?. On the other end, if your bond has a 5% interest rate and the new bond rates are 2%, you are going to have a lot of bond investors looking to buy your bond if you decide to sell it.. Because of this, you as an investor need to do your homework before investing in muni bonds, or any bond for that matter.. Also, muni bonds have a de minimis rule , where a bond purchased for a minimum discount it is subject to capital gains tax and not ordinary income tax.

In 2Q 2022, interest rates rose, yields moved sharply higher, and investors sold municipal bonds to make tax payments, spurring outflows that challenged municipal bond market liquidity.. Additionally, clients may want to consider rebuilding their core portfolios given the substantial increase in yields and attractive relative value of municipal bonds.. The past few years have been challenging for fixed income investors as steadily declining interest rates and strong corporate fundamentals have tilted asset allocation toward risk assets—and away from traditional fixed income.. In this issue, Margaret Byrne, Senior Fixed Income Specialist, discusses opportunities in the market and portfolio positioning with Richard Taormina, Portfolio Manager and Head of Tax Aware Strategies.. On top of that, tax time typically puts pressure on the muni market as clients sell bonds to pay taxes, so munis became cheap.. RT: Previously, ratios were at levels that made it mathematically uneconomical to own municipals; this year’s dramatic repricing, however, has brought munis back to levels that make them very attractive to investors in the highest tax brackets, as well as corporations and insurance companies.. Even corporations, which pay a 21% tax rate, can pick up 23bps of after-tax yield on five-year bonds and 64bps on 10-year bonds by buying munis instead of Treasuries.. The bond market’s dramatic repricing in early 2022 has made municipal bonds attractive once again to individual and institutional investors. Exhibit 1: AAA municipal bond yield pickup vs. Treasuries (after tax). Calculations assume individual tax rate of 40.8% and corporate tax rate of 21%.. Conversely, clients with a longer cash spending runway may pick up excess yield by stepping out to bond strategies with less than one year’s duration, because the market has already priced in most of the rate hikes we expect this year.. For clients slowly moving out the curve, implementing a combination of ultra-short duration and core bond strategies may help manage duration risk while taking advantage of the steepening yield curve and rising rates.

Conventional wisdom holds that municipal bond investors living in high-tax states should focus on owning bonds issued in their state of residence in order to earn income free from federal, state, and potentially, local taxes.. However,the decision to only invest in bonds from your home state is not always clear-cut, especially if the investor is interested in maximizing after-tax income in their portfolio rather than attempting to minimize their tax bill.. The 2018 tax law changes capped the deductibility of state and local taxes at $10,000 for joint filers, which will drive up effective tax rates for investors in a number of higher-tax states.. Investors who are subject to higher state tax rates and focus solely on in-state bonds may be limiting their after-tax income.. Out-of-state muni bonds (national) tend to offer higher yields (more income) than in-state muni bonds after adjusting for taxes.. States with very high personal income tax rates create an outsized appetite for in-state bonds, thus driving in-state bond prices higher.. Due to excess demand from the state’s high tax rate, this is a lower yield than the Bloomberg National AAA-rated ten-year yield of 2.76%.. Moreover,there are seven states 2 that do not currently have a state income tax.. Without the excess demand from in-state investors, a bond from those states can often provide more yield (income) than a similarly rated bond from a high-tax state.. Depending on current yield levels, looking for municipal bonds outside of your home state may provide higher income.. Investors should take the extra step and compare the yield of in-state municipal bonds to the after-tax yields on national municipal bonds.. 2 Bonds in these states without an income tax may offer higher yields than states with high income tax rates: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes.. BMO Asset Management Corp., BMO Investment Distributors, LLC, BMO Private Bank, BMO Harris Bank N.A.

First of all, overall credit quality in the municipal market is generally pretty strong.. Dziubinski: Beth, how have muni-bond funds in general performed so far this year?. Dziubinski: Beth, we've seen the high-yield muni categories largest strategy Nuveen High Yield Municipal Bond, closed to some new investors, and you don't often see a muni-bond fund close.. Foos: Right, we don't see that very often.. And I think what that's saying, particularly about the high-yield muni market, is although it's very popular, the true high-yield muni space is a very small part of the overall muni market.. Dziubinski: And we rate several high-yield muni-bond funds pretty highly.. Tell us a little bit about that bond and what we like about it.. Dziubinski: And then there are a few other funds that we assigned fund Analyst Ratings of Silver to in this high yield muni-bond category.

A money market mutual fund is a type of fixed income mutual fund that invests in debt securities characterized by their short maturities and minimal credit risk.. Income generated by a money market fund can be either taxable or tax-exempt, depending on the types of securities in which the fund invests.. Fund typePrimary types of instruments heldGovernment including. U.S. Treasury Treasury onlyNormally at least 99.5% of the fund’s total assets are invested in cash and U.S. Treasury securities—including at least 80% of the fund’s assets in U.S. Treasury securities.TreasuryNormally at least 99.5% of the fund’s total assets are invested in cash, U.S. Treasury securities and/or repurchase agreements * collateralized by U.S. Treasury securities—including at least 80% of the fund’s assets in U.S. Treasury securities and repurchase agreements for those securities.GovernmentNormally at least 99.5% of the fund’s total assets are invested in cash, U.S. government securities and/or repurchase agreements that are collateralized fully (i.e., collateralized by cash or government securities)—including at least 80% in U.S. government securities and repurchase agreements for those securities.. Municipal (sometimes. known as tax-exempt) National municipalNormally at least 80% of the fund’s assets are invested in municipal securities whose interest is exempt from federal income tax.State municipalNormally at least 80% of the fund’s assets are invested in municipal securities whose interest is exempt from federal and state personal income taxes.. These funds may continue to seek to maintain a stable $1.00 net asset value (NAV), but are subject to potential liquidity fees and redemption gates (i.e., the fund may impose a fee upon the sale of your shares, or may temporarily suspend your ability to sell shares, if the fund’s liquidity falls below required minimums because of market conditions or other factors).. Institutional prime and institutional municipal money market mutual funds are funds that do not qualify as retail funds—i.e., they may be held by institutional investors.. Government money market mutual funds, including U.S. Treasury funds, are available to both retail and institutional investors, and are not subject to potential liquidity fees, redemption gates, or a floating NAV.. While the returns on money market funds are generally not as high as those of other types of fixed income funds, such as bond funds, they do seek to provide stability, and can therefore play an important role in your portfolio.. The objective for many money market funds is typically to provide current income consistent with principal preservation U.S. Treasury and government money market funds potentially can offer a lower credit risk and return profile than prime money market funds Municipal money market funds may be appropriate for nonretirement accounts that are not already tax-shielded. Stability Money market mutual funds are considered to be one of the least volatile types of mutual fund investments Liquidity It’s easy to settle your brokerage account trades in other investments, or retrieve funds from a money market mutual fund—generally assets are available by the next business day Security The funds are required by federal regulations to invest in short-maturity, low-risk investments, making them less prone to market fluctuations than many other types of investments Short duration Because the duration of money market mutual funds is so short—at maximum a few months—they are typically subject to less interest rate risk than longer-maturing bond fund investments Diversification Money market mutual funds tend to hold many different securities, with limited exposure outside U.S. Treasury funds to any single issuer Potential tax advantages Some money market funds invest in securities whose interest payments are typically exempt from federal, and in some cases, state income taxes; these funds can be a potential source of stable, tax-efficient income. Credit risk Unlike typical bank certificates of deposit (CDs) or savings accounts, money market mutual funds are not insured by the Federal Deposit Insurance Corporation (FDIC); although money market mutual funds invest in high-quality securities and seek to preserve the value of your investment, there is the risk that you could lose money, and there is no guarantee that you will receive $1 per share when you redeem your shares Inflation risk Because of the safety and short-term nature of the underlying investments, money market mutual fund returns tend to be lower than those of more volatile investments such as typical stock and bond mutual funds, creating the risk that the rate of return may not keep pace with inflation. Money market mutual funds own a well-diversified pool of high quality, short-dated, interest-paying securities, and pass along the income earned on those securities (after fees) to the funds’ shareholders.. When the yields on the securities in which money market mutual funds invest are quite low, the yields that the funds are passing along to their shareholders are also quite low.. The rules that govern money market mutual funds permit the funds to buy only securities that mature in 397 days or less.. Money market mutual funds, like bond and stock mutual funds, are investments, and, as such, are not guaranteed.

In March 2020, the Federal Reserve made municipal securities eligible for its Commercial Paper Funding Facility (CPFF) (meaning the Fed was willing to buy short-term muni debt directly from state and local governments) and for the Money Market Mutual Fund Liquidity Facility (MMLF) (meaning that the Fed would make loans to banks secured by municipal securities bought from money market mutual funds).. Based on the historical relationship between unemployment and muni bond rates, Michael D. Bordo of Rutgers and John V. Duca of the Dallas Fed estimate that muni yields could have risen by as much as 8 percentage points more than they did in mid-April had the Fed not launched the MLF on April 9.. In a paper presented at the Hutchins Center’s 10 th Annual Municipal Finance Conference , Andrew Haughwout, Benjamin Hyman, and Or Shachar of the New York Fed show that the introduction of the MLF particularly lowered yields in the private market for low-rated issuers, and allowed local governments to more easily borrow money to retain employees despite falling revenues and higher spending due to the pandemic.. Huixin Bi and W. Blake Marsh of the Kansas City Fed investigate whether the increases in muni bond yields at the onset of the COVID crisis reflect overall liquidity risk (concern that a muni bond would be difficult to sell quickly without a substantial decline in price) or local credit risk (concern that counties with high COVID cases per capita would not be able to pay their debts on time).. Observing that yields on both sets of bonds fell after Fed announcements, the authors conclude that policy interventions stabilized muni yields significantly by lowering liquidity risks, but didn’t immediate ease credit concerns—that is, worries that a prolonged economic downtown would make it difficult to governments to pay debt service on time.. The Fed did not intervene in the secondary market for muni bonds, as it did in the secondary market for corporate bonds.. At the start of the crisis, secondary market dealers stopped buying and started selling muni bonds held by mutual funds, and continued to do so even after the Fed’s interventions stabilized the muni market—leaving a lingering spread of about 30 basis points, a “fire sale premium,” between bonds held by mutual funds and those that were not.. In the corporate bond market, however, which also saw large outflows from mutual funds at the start of the crisis, the announcement of the Fed’s Secondary Market Corporate Credit Facility offered reassurance to dealers that the Fed would purchase secondary market corporate bonds and stabilize liquidity in the market.

One type of bond often heard in the industry is municipal bonds.. Here’s what you need to know about how to invest in municipal bonds.. If you have a lower income or live in a state that doesn’t have state income taxes, such as Florida, municipal bonds are less attractive.. If you want to invest in municipal bonds, you can buy individual bonds or invest in mutual funds made up of municipal bonds.. Municipal bonds tend to have fixed interest rates, so you’ll get regular income payments semi-annually until the bond reaches its maturity date and the issuer repays the principal.. If you want a broader range of investments, consider investing your money in a municipal bond fund instead.. Plus, municipal bond funds are more liquid than individual bonds, so you can sell your bonds more quickly.. The very first step is to look for the municipal bond fund in which you'd like to invest.. Investing in municipal bonds can help you generate interest and steady income.

With a mutual fund, huge groups of investors pool their money, while the managers of the bond fund then choose the bonds the fund will buy using that money.. The idea of using mutual funds vs. bonds is that pooling money allows investors to spread their risk over lots of bond investments instead of just owning one bond. With a mutual fund, the managers buy up bonds and the fund will yield whatever that collection of bonds happens to pay out.. A bond mutual fund manager will buy and sell bonds that align towards the fund’s specified strategy.. When it comes to investing in mutual funds vs. bonds, mutual funds have several advantages:

The diverse nature of the portfolio makes a mutual fund less risky than buying an individual stock or bond, but if you’re not careful, sales and administrative fees can take a serious bite out of any gains your investment earns.. The fund’s top holdings include Microsoft, AbbVie Inc., Raytheon Technologies Corp., UnitedHealth Group, Comcast and other companies that fund managers believe are undervalued, but the portfolio might also contain bonds and other debt securities.. AMFFX is down 6.82% year to date as of July 26.. Its top 10 holdings, which make up over 43% of the portfolio, include blue chip companies like Apple, Microsoft, Alphabet, UnitedHealth and Amazon .. The fund’s risk level is above average because it’s fully invested in stocks, but it has outperformed large growth stocks overall over the last five years and significantly so over the last year.. As a large growth index fund , FSPGX aims to replicate the total return of large-cap U.S. stocks.. At least 80% of its assets are typically invested in securities found in the Russell 1000 Growth Index, which tracks U.S. large-cap growth stocks.. It has outperformed large growth stocks overall during the past year, losing 18.80% compared to 23.86%, as well as over three and five years.. PRTAX is a fairly low-risk fund that invests mostly in long-term investment-grade municipal bonds to provide a high level of tax-exempt income.. It’s a lower-risk fund by nature of its bond holdings, and returns are above average compared to other municipal bond funds.

These investors can research and select bonds that work best for their portfolio in terms of risk and return, maturity date and tax benefits.. Municipal bond ladders: When you purchase an individual bond and hold it, you don't get your principal back until the bond matures.. An investor buying a muni bond is funding that particular project over a set period of time.. A revenue bond uses the money generated by the project to fulfill its debt obligations.. Default risk: While these bonds are a relatively safe investment, municipalities can sometimes find themselves in financial hot water.. Such defaults are rare, and you can combat default risk by researching the municipality and reviewing the credit rating for the bond you’re interested in.. Interest rate risk: Similar to other fixed-income counterparts, muni bonds generally have an inverse relationship with interest rates.. If you purchase a bond and later interest rates rise, you are locked into receiving a return less than what you would receive by buying a new bond at the higher interest rate.

When you think of bonds vs stocks (we’ll explain mutual funds a bit later), bonds are usually considered the safest of the two assets.. For example stocks may be broken down further into U.S stocks, non U.S. stocks, small stocks, and large stocks.. Bonds may be broken down into short-term maturity bonds, high credit quality bonds, non-U.S. bonds, and U.S. bonds.. In the bonds vs stocks vs mutual funds comparison, mutual funds sound the most complicated, but the concept is simple.. Mutual funds can invest in any asset class, so you can find bond funds, stock funds, money market funds, funds that invest in commodities such as precious metals or oil and gas, foreign exchange (forex) funds, real estate funds, and even cryptocurrency mutual funds.. Instead of hiring analysts to pick stocks for the fund, the fund manager simply buys the stocks on the index in roughly the same proportion as the underlying index.. When you’re looking at bonds vs stocks vs mutual funds for your retirement investment strategy , passively managed funds have historically outperformed their active counterparts a majority of the time.. The rest should be in safe assets such as bonds, bond funds, and money market funds.

Although the par values are generally fixed, the price of a given bond can fluctuate in the secondary market depending on the direction of interest rates.. Access to institutional pricing: Bond funds generally receive better pricing on individual bonds than individual investors do.. If the fund is more actively managed, it also allows for the manager to buy or sell bonds when interest rates rise or fall, potentially increasing returns and income.. Investor Preferences and Circumstances Management Style Managed by the investor. Professional management that can be active or passive Minimum Investment Amount Preferably large. Small Fees The commission charged per bond may be higher for small purchases than for large purchases.. Management fees and sales fees depending on the share class Income Frequency Typically semiannually. Typically monthly Predictable Market Value at Maturity Yes, barring default. No Option for Automatic Coupon Reinvestment No. Yes Cost Basis Individual cost basis for each bond. Cost basis is based on the price paid for the share of the fund Customization Yes. No Diversification Harder to achieve. Easier to achieve. There are three important considerations when determining whether an individual bond or bond fund is best for you: the amount you have to invest, your financial goals and your behavioral preferences.. The amount of assets you have to invest in your bond portfolio is a key consideration when determining whether to invest in individual bonds or bond funds.. In the long run, the difference in performance between a portfolio of individual bonds and a bond mutual fund with the same duration and credit quality, held for the same amount of time, is likely to be small, because most of what an investor gets out of investing in bonds is the income generated by coupon returns, rather than the price change.. The decision often comes down to the amount you have to invest, the preference for a professional manager, and the need for a predictable value at maturity.

Tax-exempt muni bonds have traditionally been attractive due to their low borrowing costs vis-à-vis taxable muni bonds with higher costs.. The concept of taxable muni bonds is not new, although due to the high borrowing costs on the issuance of taxable muni bonds, issuers prefer to borrow funds using tax-exempt bonds.. In addition, the IRS stipulates that tax-exempt bonds can be issued only to finance “qualified” projects that directly benefit the general public; this creates a further bottleneck, which could be resolved by issuing taxable muni bonds.. In addition, in the low interest rate scenario, the borrowing costs of taxable bonds are only marginally higher, further boosting issuance of taxable muni bonds.. This bolstered issuance of taxable muni bonds in 2009 and 2010, enabling municipal/local authorities to issue taxable bonds at subsidised interest rates to keep borrowing costs low.. In June 2021, USD33.9bn worth of tax-exempt muni bonds and USD11.4bn worth of taxable muni bonds were issued (while corporates issued USD172.9bn worth of bonds).. Even after adjusting for taxes, taxable muni bonds offer higher yields than do tax-exempt muni bonds for taxpayers in the tax bracket of 32% and less.. The chart above shows that taxable muni bonds constitute 78% of the muni bond market with a credit rating of AA- or above, compared with only 7% of the corporate bond market.

Investors who want a higher returns can invest in high yield municipal bonds.. While private entities can also issue high yield bonds, only state or local governments can issue high yield municipal bonds .. As a result, high yield bonds generally produce considerably higher returns than investment grade bonds.. High yield bonds also come with considerably greater risk than investment grade instruments.. When investing in high yield municipal bonds the risk increases.. When corporations issue high yield bonds rated below investment grade, they are typically known as “junk bonds.” Municipal bonds are not considered junk bonds, chiefly because they are much more stable than corporate bonds.. While both are high yield, low-grade instruments, it is important not to confuse corporate junk bonds with high yield municipal bonds.. Returns on both high yield and investment grade municipal bonds are exempt from federal taxes.. While investment grade municipal bonds have a low rate of default, less than 1%, high yield municipal bonds have a high one.. Because high yield bonds generally fund more speculative projects they are also more vulnerable to economic performance than traditional bonds.. Individual investors will most likely invest in high yield municipal bonds through a mutual fund or an ETF .. High yield bonds respond to different economic pressures than investment grade bonds.. This means that the high yield section of your portfolio will have a different risk profile than the investment grade bond segment.. Meanwhile, high yield corporate bonds are just one type of bond.


1. Pluses and Minuses to High-Yield Municipal Bonds
(Morningstar, Inc.)
2. Why Investors Use Money Market Funds
(ICI Video)
3. What are Municipal Bonds? | Fidelity
(Fidelity Investments)
4. Should investors buy the muni bond rout or wait it out?
(CNBC Television)
5. Market volatility ‘always creates better value’: BlackRock Head of Muni Bonds Group
(Yahoo Finance)
6. Why investors are excited about the municipal bond market
(CNBC Television)

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