Why A Quality Bias Still Makes Sense in the Municipal Market

As long-time investors, we realize that people invest in municipal bonds for safety, stability and tax-free income. The stability was rocked recently by the economic concerns from the COVID-19-induced shutdown, and the safety of municipal debt has come into question. The media has focused their attention on the potential increase in municipal defaults/bankruptcies. What is needed now is some balance and perspective.  In our latest whitepaper Why A Quality Bias Still Matters, our investment team provides insights into why it’s important to maintain a high-quality bias in the municipal market until the outlook is more certain.

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Fixed income is generally considered to be a more conservative investment than stocks, but bonds and other fixed income investments still carry a variety of risk such as interest rate risk, regulatory risk, credit risk, inflation risk, call risk, default risk, political risk, tax policy risk and liquidity risk. In a rising interest rate environment, the value of fixed-income securities generally decline and conversely, in a falling interest rate environment, the value of fixed income securities generally increase. Municipal securities investments are not appropriate for all investors, especially those taxed at lower rates. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). Investment grade investments are those rated from highest down to BBB- or Baa3.