Unleashing the Power of High-Yield Municipal Bonds
Are you an investor comfortable with taking more risk to achieve attractive returns? If so, high-yield municipal bonds might be the perfect addition to your portfolio. While these bonds come with greater default risk compared to their investment-grade counterparts, the potential rewards are impressive.
In the first half of the year, high-yield municipal bonds, rated below BBB by Standard & Poor’s, outperformed their investment-grade peers, posting total returns of 4.72%. On the other hand, investment-grade munis saw a return of -0.07% during the same period. The appeal of tax-free income on a federal and state basis (for in-state investors) is drawing more investors towards high-yield muni bonds and funds.
According to Morningstar, high-yield muni bond funds have experienced estimated net flows of $6.76 billion in 2024 as of June 30. This trend highlights investors’ growing interest in juicing up their portfolio income in the current economic environment.
Default rates for municipal bonds, even those that are not investment grade, are generally lower than what investors encounter with corporate bonds. A Moody’s analysis revealed that the 10-year cumulative default rate for “speculative grade” munis stood at 6.84%, significantly lower than the default rate for speculative-grade corporates.
Given the risks involved and the diversity of issuers in the high-yield muni bond space, using a fund to access these opportunities might be the most prudent approach. Active managers with a strong and experienced team can uncover hidden stories behind the numbers to understand the risks better.
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As the investment landscape continues to evolve, high-yield municipal bonds present an enticing opportunity for investors looking to diversify their portfolios and maximize their income potential. Stay tuned to Extreme Investor Network for more expert insights and guidance on navigating the world of investing.