Too often, the essentials of muni investing are lost in the chatter.
Take, for example, “performance.”
June was a banner month for munis, returning 1.6%, the best June since 2000 and the biggest uptick in 18 months, according to Bloomberg.
This came despite a month that traditionally sees a lot of new issuance, which should potentially weaken the market.
A strong muni market
But June isn’t just a one-month blip. Overall this year, muni returns of 4.3% (6.2% on a tax-adjusted basis) beat Treasuries (5.4%) and are slightly ahead of the S&P.
Though this information is interesting and makes good copy, it’s virtually beside the point for individual municipal bond investors.
Muni investors don’t watch the market prices of their holdings. That is, in the vast majority of circumstances, they don’t buy to sell. They focus on the steady stream of tax-free income their bonds generate, regardless of what the market says their price is at any given moment.
They hold their bonds to maturity for return of principal and know in the meantime, their bonds will rise and fall in market value.
Make no mistake: Municipal bonds are in demand
Munis are indeed popular right now. Despite relatively low yields, inflows into muni bond mutual funds in the first half of this year reached $30 billion, three times as much as in all of 2015, while investors added another $2.9 billion in muni bond ETFs.
At this rate, inflows will set a record.
What gives?
A soft U.S. economy, weak job growth and inflation still below the Fed’s 2% target are significant factors boosting bond prices and lowering yields.
Also stirring the market is a flight to safety amid Britain’s vote to leave the European Union, though even before the vote, state and local-government bonds funds had big inflows – $1.4 billion in the week ending June 22, the most since January 2013.
For those who’ve invested regularly when cash was available, one month’s market machinations mean little. However, for investors sitting on cash, earning negative returns in money-market accounts or in short-term bond ladders, there’s an important takeaway.
What’s up and what’s down – the benchmark for stocks – doesn’t apply to munis.
Though it makes a good story, the lesson for those still on the fence about the muni market and where rates might go is clear: it’s time to put your money to work.
