A Closer Look at Municipal Debt, its Advantages and Risks

The market for municipal bonds — debt obligations issued by states, cities, towns or public commissions to fund schools, hospitals and public works projects —  appears to be holding steady despite heightened uncertainty in recent years.

For some investment specialists, municipal bonds represent an option for income-seeking investors looking for high-quality fixed-income assets. Municipal bonds are also increasingly being coveted by investors because they offer several unique advantages over other fixed-income securities.

So should you move in to municipal bonds now? The answer depends on your situation. For investors whose financial objectives include the preservation of principal or reliable cash flow, bonds should be a consideration.

Investors are attracted to municipal bonds because they are generally exempt from federal taxes, and sometimes, from state and local taxes. As a result of their unique tax-exempt status, municipal bonds may provide investors with tax-equivalent yields that are greater than taxable bonds, including some Treasuries and corporate bonds.

What’s more, municipal debt is typically of high credit quality, with many investment grade municipal bonds maintaining their credit rating despite default worries.  Municipal bonds can also be attractive to some investors because their returns tend to be less volatile, helping bond buyers predict how much they will earn, and when their principal will be returned.

Municipal bonds holders are predominately individual investors. Since retail investors typically buy and hold municipal bonds until maturity, the market experiences less volatility than other fixed income asset classes.

With municipal bonds offering such attractive benefits, new investors may be ready to incorporate the bonds into their investment portfolio. However, before investing, you should be sure you understand the market risk.

For instance, municipal bond prices fluctuate in response to changing interest rates, as do other fixed-income securities. Prices increase when interest rates decline, and prices decline when interest rates rise.

Since each investor’s goals, and portfolio size and history are different, the process of building a municipal bond portfolio should be conducted with an experienced financial advisor, who can weigh their personal financial objectives with current market conditions to deliver sound investment guidance.

Whether you are searching for tax-advantaged income, trying to help safeguard your principal, saving for college or targeting other financial objectives, consult with your financial advisor to determine if investing in municipal bonds could help you pursue your goal.

As a firm providing wealth management services to clients in the U.S., we offer both investment advisory programs and brokerage accounts.  Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts.  For more information, please visit our website at www.ubs.com/workingwithus

The information contained herein is based on sources believed to be reliable, but its accuracy is not guaranteed.  UBS Financial Services Inc. does not provide tax, legal or accounting advice. Please contact your tax advisor regarding the suitability of tax-exempt investments in your portfolio and your accounting advisor to determine the appropriate accounting treatment.  Income from municipal bonds may be subject to state and local taxes as well as the Alternative Minimum Tax.  Call features may exist that can impact yield.  If sold prior to maturity, investments in municipal securities are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer.