Buying municipal bonds is a good move, but not for everyone

It has taken some time, but
the UK Municipal Bond Agency (UKMBA) has finally got its first issue of the ground.
They have teamed up with Lancashire County Council to issue
their first bond, aimed at raising £350 million over a 5 year term.

 A second bond issue is expected soon, with
£250 million on a 10-year fixed rate being mentioned. This municipal bond would
involve a number of local councils. Why should you be interested in investments
of this type?

The basics

Municipal bonds are
uncommon in the UK. Yet, the global market in these bonds was some $US 3.8 trillion
worth of assets in 2018, with the US being a particular
hotspot.

The UKMBA was
set up in 2014 but we have had to wait until 2020 for their first issue. Their goal is to allow the country’s local
authorities to access affordable borrowing for their projects. This is good news for the authorities, who can go ahead with their plans
more easily and more cheaply.

For borrowers, the first big benefit is the
guarantee that is offered. This is one of the most rock-solid investments
around. It would take something extraordinary for a default to occur on a
municipal bond from a trusted authority.

Some bonds are also exempt from tax. This is
why people who are in high tax brackets tend to like them. The value of these
bonds will fall when interest rates rise, especially if it over a longer term.

Should you be interested in buying municipal bonds?

As we have seen, they can be attractive to
those people who are in high tax brackets. They will also appeal to someone who
wants to protect their funds above all else. The returns are generally fairly
modest, so you won’t make a fortune on them and might not beat inflation.

It is also worth remembering that liquidity
on them is often poor. You don’t want to tie up money that you might need to
access.

The low level of volatility is a plus point.
Looking at it overall, we can see a picture emerge of the ideal purchaser. It
is probably someone who pays a lot of taxes, has extra savings they can afford
to tie up, and is more worried about preserving their capital then making a big
profit.

It could be right for someone who wants to
put away something safe for their retirement, for example.

Other options

Municipal bond ETFs let you put your trust in
a fund manager who will look for the best current deals.

The SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond ETF(NYSEARCA: HYMB) is a long-standing
fund of this type. It has been going since 2011 and tends to focus on municipal
bonds of 20 years or more. The current yield is 3.92%.

Not everyone
should bother about buying municipal bonds. But for a certain type of investor,
this is a sound choice just now and for the foreseeable future.