Muni Bond Yields Come Down; Investors’ Interest Rekindles

Muni bond yields, both high and low, are attractive to different types of investors; thus, this dynamic appeal will always be a boon to municipal bonds, as the current strength of the bond market, despite America’s debt crisis plaguing all levels of government, can attest to. While the threat of municipal bond defaults will always be on the minds of investors during difficult economic periods, the municipal bond market has shown time and time again that it remains highly durable and continues to be an asset to local governments trying to diffuse their debt levels.

Bond Yields Drop in July

Despite reports last week that muni bond yields were climbing, leading to a ripple of panic in the investment world, they’ve completely turned around in the past few days. In fact, yields now rest at the lowest point the market has seen in six weeks. Moreover, municipal bonds have rebounded by 3.96% in 2010 and overall issuance has doubled to nearly $7 billion this week alone. Muni bond yields on tax-exempt general obligation bonds are also the lowest they’ve been in nearly a decade. Investors are embracing municipal bonds, because with lower muni bond yields comes lower risk of municipal bond defaults, which encourages skittish investors to let down their guards to an extent. Conversely, in the event of another spike, high yields entice more intrepid investors who are willing to tackle risk in order to make more income.

Muni Bonds Go Strong

Currently, municipal bond defaults are not of great concern -- with relatively low instances of this actually occurring in 2010. The safety of muni bonds relative to corporate bids is one of the greatest appeals of the municipal bond. With each general obligation bond comes the pledge made by municipalities to do whatever it takes to avoid municipal bond defaults, which greatly helps to ease the minds of investors.

It is true that, when compared to Treasury bonds, munis are generating weaker returns in total – for the time being, anyway. However, this could very well change in the near future, as Treasury bond income slowed to a crawl this month -- falling at less than .1% -- compared to the .6 muni rates.

Muni bonds have proceeded with great momentum in the past year with the market having made its best gains in a decade in 2009. While investors are justified in worrying over American and foreign debt, municipal bond defaults aren’t likely to happen en masse. Don’t cry for munis just yet – these bonds aren’t going anywhere.