4. … Generally Lower Volatility. It’s not that munis don’t experience the highs and lows of the financial markets. In fact, we saw this in dramatic fashion in late May and June. But history shows us this is the exception rather than the rule. Typically, munis’ response to market-moving events is much more muted than that other fixed income assets. This intrinsic cushion has made for a relatively smoother ride for muni investors over the long term.
The municipal bond market has evolved considerably over the years. It weathered major tax reform changes in 1986, and the loss of big investors in the aftermath. Between the 1990s and 2000s, it saw the rise and fall of municipal bond insurers. Five years after the 2008 credit crisis, it has completed its transition from an interest-rate-based market to one driven more by credit events. Although I doubt I’ve seen it all, I have lived and invested through enough to know that I still like what I see today.
Peter Hayes is Head of the Municipal Bonds Group at BlackRock.
* Moody’s Investors Service Special Comment, “US Municipal Bond Defaults and Recoveries, 1970-2011,” March 7, 2012, and Moody’s “Annual Default Study: Corporate Default and Recovery Rates, 1920-2012.”