Arguments For and Against the Long-Term Municipal Bond

Despite the recent fear of municipal bond market collapse, studies show that baby boomers have flocked to municipal bonds like never before. While many experts would encourage investors to play it safe when building their portfolios by avoiding high duration bonds from states with high deficits and increased risk, such as California and Florida, many are doing just the opposite. In fact, the trend has been for investors who are craving higher yields to more often target municipal bonds with long-term maturity dates. Still, it must be stated that these investments come with a wider opportunity for risk, and may not be ideal for everyone.

Is a Long-Term Investment the Right Route for You?

When you’re shopping around for municipal bonds to further build out your investment portfolio, the crux may be choosing between an investment with high bond ratings or foregoing those for the fatter yields.

Upon weighing the pros and cons of a municipal bond and its duration, you should ask yourself if you need the liquidity that a short-term period can provide, or can you comfortably extend the maturity for the sake of a higher yield?

Why Is a Long-Term Municipal Bond Synonymous with Risk?

The longer you’re holding onto your investment, the more opportunity there is for interest rates to rise, and municipal bonds 101 tells us the investment will then be sold at a discount to par, should this happen. There’s less of a window for this to happen in the short-term, and the feat of holding a short-term municipal bond to maturity is a lot easier to manage when you’re not looking at a maturity date that’s set to happen after a period of 30 years.

Typically, those who go for the high duration, high risk, high yield investments are those individuals that fall in the higher tax brackets, which affords them the opportunity to be in a position to worry less about inflation. If this describes you, and you happen to have money set aside that you don’t intend to touch, then long-term municipal bonds may be considered.

When Short-Term Municipal Bonds Are Ideal

However, as the interest rates are rising steadily, due to a general consensus that we’re experiencing an economic recovery, long-term municipal bond investors may find themselves in a bit of hot water. Additionally, these investments hold little appeal to those who must have the liquidity that comes with a short-term municipal bond. Those who rely solely on this form of income to sustain themselves are probably going to find that the patience and risk associated with the longer duration municipal bonds are hardly ideal, let alone viable.