Who’s Buying Individual Municipal Bonds?

Klotz on Bonds

Home > News and Perspectives > Who’s Buying Individual Municipal Bonds?

<h3>James A. Klotz</h3>

James A. Klotz

For tax-free income investors aiming for more certainty in reaching their goals without distracting market noise, there’s a simple answer: Individual municipal bonds.

By investing in specific issues, investors know what the soothsayers can only guess: their return. After all, with individual munis, their income rate is fixed.

It doesn’t matter where interest rates go – or where prognosticators think they’ll go. Investors are rewarded with the ability to more precisely achieve their income objectives and gain peace of mind.

Who's Buying Individual Bonds

A flood and a decision

The issue of how to invest in the municipal bond market is especially relevant now, as a record amount of cash floods in. In the first six months of this year, an estimated $56.9 billion in net new money poured into the market, the most for any first half since 1992, according to The Wall Street Journal.

There are several reasons for the enthusiasm (“Top Insurers are Boosting Their Muni Bond Holdings”). Taxes are expected to rise. Plus, the pandemic’s effects on state and local government revenues were, for the most part, less severe than many predicted and were bolstered by aid from Washington.

Further, investors who benefitted from the dramatic rebound of stocks are now looking to conserve those profits. And tax-free munis are more attractive than similarly rated corporate bonds.

So, with investors streaming into the municipal bond market, it’s worth analyzing how they should do so.

Allure of individual municipal bonds

While aiming to achieve a particular level of tax-free income, investors face a high degree of economic uncertainty. Markets are gyrating wildly, and while plenty of experts are eager to weigh in on interest rates, inflation and myriad other economic factors, their analyses are often conflicting and sometimes nonsensical.

Individual bonds provide a respite from the unknown.

Investors who buy individual bonds thrive on the promise their principal will be returned when their bonds mature or are called. With mutual funds, there’s no such guarantee.

They don’t encounter the trading costs associated with mutual funds and avoid ongoing fees.

Through thoughtful selection, they can effectively diversify their bond holdings.

There’s no reason for investors to be saddled with the futile task of trying to outguess the markets. For long-term success and a predictable, steady stream of tax-free income, the most successful investors focus on individual bonds.

Investing in individual municipal bonds is often regarded as boring because the vast majority perform as promised without drama.

It also explains their allure.

James A. Klotz is the President of FMSbonds, Inc.
Email the Author

Jul 22, 2021

Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.