Welcome to Season 2, Episode 3 of Meet the Expert® with Elliot Kallen!
A well-managed bond portfolio can help retirees generate attractive returns while also managing volatility and mitigating risks. Elliot Kallen brings on Nick Henry, Portfolio Manager at Invesco to discuss the role of municipal bonds in your bond portfolio.
Nick Henry, MBA
Portfolio manager, invesco
Nick Henry is a client portfolio manager at Invesco. He specializes in fixed income education, municipal bonds, and the capital markets.
Municipal Bond Basics
Municipal bonds are unique, because:
- Unlike Corporate Bonds and Treasury Bonds, the Muni market is traded over the counter.
- The Muni market is a heavily retail-driven marketplace, whereas the Treasury, Corporate, sovereign fixed-income markets have heavy influence from institutional buyers.
- The Muni bond marketplace is 75% driven by retail mom-and-pop investors. Because retail investors are driving the market for municipal bonds, the Muni market has less liquidity.
What’s the difference between buying a state-specific bond and a national bond fund?
Most investors are drawn to National Muni bonds because, in general, the interest income is Federal tax-free.
If you invest in a bond within your state, and your state has a state income tax (e.g., California, New York, or New Jersey), you’ll also be exempt from paying State income taxes.
Investors should invest in both state-specific and national bonds for the purpose of diversification (e.g., of bond yield).
What’s the difference between a municipal bond fund and a bond ladder?
The biggest difference is in diversification.
Bond ladders typically contain 15 to 20 individual bonds that mature on different dates. This strategy is designed to provide current income while minimizing exposure to interest rate fluctuations.
Larger municipal bond funds typically contain 1,000 to 2,000 different holdings.
This minimizes your exposure to fluctuations in bond yields and other factors that affect your fixed-income strategy.
Are there any risks involved in Muni bonds?
Muni bonds are a highly stable asset class. They are among the safest, most tax-efficient debt investments, with a historically low default rate.
From an investment standpoint, you’re over 90 percent likely to receive your principal and interest back.
What factors influence Muni bond prices?
Bond prices are influenced by several factors, including:
- Civic unrest
- Interest rates
- Higher coupon rates
- Interest rates
- Prices on existing bonds
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DISCLAIMER: Prosperity Financial Group and Meet the Expert® with Elliot Kallen do not make specific investment recommendations on Meet the Expert® with Elliot Kallen or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of the Meet the Expert® with Elliot Kallen guests, and not necessarily of Elliot Kallen or Prosperity Financial Group.