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Why Invest in the Municipal Bond Market

Thursday, Jul 03, 2014

Capital Preservation and Tax Exempt Income

The municipal bond market dates back to the early 1800s. The first officially-recorded municipal bond was a general obligation bond issued by the City of New York for a canal in 1812.

Since then, the municipal bond market has grown to consist of approximately $4 trillion in outstanding bonds, which encompasses over 50,000 issuers and more than 1.5 million different securities with varying credit structures. In fact, the municipal bond market is the primary credit market for state and local governments in the United States.

You may be wondering why the municipal bond market has seen such rapid growth and why municipal bonds are such a coveted investment.

When an investor purchases municipal bonds, the entity they lend money to promises to pay that investor a specified amount of interest and return the principal on a specific maturity date. Municipal bonds offer high reliability with relatively infrequent defaults. Additionally, municipal bonds are considered to be second in safety only to U.S. Treasury securities.

Today, individuals are the largest holders of municipal bonds, owning over 70% of the municipal market.

High Recovery on Defaults Even during the Great Depression

There have been less than 10,000 investment grade municipal bond defaults since 1839. Almost half of the defaults that did occur happened during the Great Depression era between 1929 and 1937. However, these defaults were cured within a few years. In 1933, municipal defaults peaked at $2.85 billion and started to fall rapidly shortly thereafter. By 1939, municipal defaults had declined to about $200 million.

Fiscal and debt management has evolved quite a bit since the Depression era. Although the recovery percentage of municipal defaults was very high, 99.50%, many municipal bond investors were forced to sell and suffered losses during this period. Today, states and local governments have adopted conservative debt limits, improved financial reporting, stronger tax enforcement and higher oversight of local governments. This has led to investment-grade municipal bond defaults becoming a rare occurrence in today’s market.

A Vast Number of Investor Benefits

The credit quality of the overall municipal bond sector has improved vastly over the last 15 years. Plus, tax-exempt municipal bonds offer a wide range of benefits aside from being free from federal, and in some cases, local taxes. Tax-exempt municipal bonds offer a high degree of safety regarding payment of interest and repayment of principal. They also offer a predictable stream of income and offer liquidity in the event the investor must sell before maturity.

The municipal bond market offers a wide variety of investment opportunities. From tax-free municipal bonds to municipal bonds with special investment features, every investor can find the perfect bond for their portfolio.

THE GMS GROUP is your municipal bond authority. Put a municipal bond specialist to work for you today and work with a full-service brokerage firm that offers High-Net-Worth individuals the best value in quality municipal bonds. Take a look at our current offerings or contact us today for more information by calling 877-467-0070.