Municipal Bonds Historical Returns
The municipal bond market is worth $2.7 trillion in the United States. State and local governments use municipal bonds to raise funds for public projects like building roads, schools and hospitals. These bonds are attractive for investors who are looking for tax exempt income so that they can reduce their income tax liability.
Historical returns of the municipal bonds have always been low compared to other high yield bonds. However, their tax exempt status has ensured that an investor earns a higher net interest income compared to the interest income from taxable bonds. Presently, investors are set to earn around 3 to 4 percent tax exempt interest payments, which are highly attractive for many.
Historical default rate of municipal bonds is lower than the default rate of corporate bonds. This fact should ease a lot of tension among investors considering the current economic situation prevailing in many states in the US. In fact, a study was conducted by Enhance Reinsurance Co. way back in 1988 which revealed that municipal bonds usually defaulted after downswings were experienced in business cycles. The study also showed that the defaults usually occurred in high growth areas that tended to borrow a lot.
Defaulting by a municipal bond automatically reflects on the payment. And, the only recourse available to investors is getting a court order and making the issuing government entity pay. However, if the entity is broke or bankrupt, it will be difficult for the investors to get their payments.
Nonetheless, municipal bonds historical returns should not be taken as an indicator for future performance. Current and future performance can be higher or lower depending on the market and business scenarios. Municipal bonds' returns will fluctuate depending on the market, therefore investors should be prepared for this.
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