Municipal Bonds Funds Rally as Bond Values Remain Steady

Municipal bonds continue to show durability in the face of national debt woes, if recent news headlines are any indication. The past week’s news bucked the trend of copious negative press that had forewarned investors over the risks of impending bond market collapse.

The two big bond-related news items over the past weeks: Yields on municipal bonds reached six week record lows (and helped to calm investors’ concerns in the process), and assets in municipal bond funds climbed to all-time record highs. Investors continue to turn to munis while stocks remain on shaky ground, because munis still offer stability in the way of steady bond values.

About Muni Bond Funds

It should be understood by all investors that the bond values of muni mutual funds, when compared to individual municipal bonds, are particularly sensitive to fluctuations in the market, and as an individual investor, you’re not guaranteed to collect principal bond values -- as would otherwise be the case if you were to invest in individual municipal bonds. Still, it would appear that investors are embracing muni funds in large numbers, despite the fact that the yields can often be far from fatty, relative to other forms of bond products.

However, this is subject to vary depending upon the specialization of a given fund. Muni funds are composed of different bonds (usually sharing the same specialty) from different municipalities that are packaged together. For this reason, some funds will carry more risk than others, depending upon the specialty involved. For instance, funds that include essential service revenue muni bonds and government bonds are less likely to default – while a fund that is comprised of hospital bonds (which are historically more prone to municipal bond defaults) may carry more risk.

The bottom line is investors prefer a predictable income and embrace dependable bond values, and municipal bond funds may appear more attractive through paying on a more frequent basis than individual bonds.

The Viability of Municipal Bonds

The healthy liquidity in the bond market can largely be attributed to the fact that bond values bring more security than stocks, despite the relative lack of oversight in the market. What helps municipal bonds remain a particularly popular option is the reduced risk, relative to corporate bonds, and better income, relative to Treasury bonds. Despite the claims of alarmists in the media, investors are seeing the strength and appreciable benefits of muni bond values and are pressing forward.