By Dr. Jim Dahle, WCI FounderI had an online conversation recently with financial advisor Allan Roth, who mentioned that he tells his clients to put no more than 20% of their bonds into municipal bonds (munis) due to default risk. He's not the only one worried about default risk either. Bill Bernstein has suggested that there should be a limit (50%) on how much of your bond money goes into munis. I was always under the impression that the default risk there was incredibly low, almost as low as Treasuries. Since this could very much affect my own portfolio, I decided to look into it a little further.
Here's what I learned.
What Is a Municipal Bond?
Ever since the US income tax was instituted in 1913, there has been a special carve out for municipal bonds, i.e., the debt obligations of states and municipalities. The interest these bonds pay is federal income tax-free. These bonds are also usually tax-free in the state of issuance. This allows state and local governments to borrow at lower interest rates and allows highly taxed investors to earn a better after-tax return than they could on Treasuries, corporates, or other bond types. It's a real win-win for everyone (except the federal government). These bonds are often packaged up into bond mutual funds or exchange traded funds which can be easily purchased by investors. That means a highly taxed investor who holds their bonds in a taxable account will often prefer muni bonds to other nominal bond types. So far, there are no inflation-indexed muni bonds.
Flip-Flopping on Muni Bonds
I've been blogging about finances now for 13 years. In no other area of investing have my views shifted as much as they have on muni bonds. I'm actually surprised I'm rarely (or perhaps never have been) called out on this, but my first blog post about muni bonds basically said, “Why bother? Your bonds belong in tax-protected accounts anyway.” When I realized a few years later that, at very low interest rates, it absolutely could make sense to hold bonds in a taxable account so your stocks could grow faster in a tax-protected account, I wrote an extremely controversial post called Bonds Go in Taxable.
Then, due to the evolution of my own portfolio, I was forced to hold at least some of my bonds in a taxable account, and given my tax bracket, I first chose to invest that money into bonds that would not result in additional federal income tax each year: I Bonds on the inflation-indexed side and a Vanguard muni bond fund on the nominal side. Thus, I went from thinking, “Why would anyone own muni bonds?” to actually having a large and ever-increasing percentage of my bonds in a muni bond fund.
Now, Allan is making me rethink even that. As I write this, 40% of my bonds (and 80% of my nominal bonds) are in a Vanguard muni bond fund with intermediate duration. I use VWIUX (Vanguard Intermediate Tax-Exempt Bond Fund) and, after 2022 when it became necessary, I used a very similar tax-loss harvesting partner in VTEAX (the Vanguard Tax-Exempt Bond Index Fund). The other 20% of my nominal bond allocation is in the TSP G Fund, the shining star of portfolios in 2022. However, the G Fund doesn't earn all that much, and I haven't made contributions to it in many, many years. It has gone from being 100% of my nominal bond allocation to now just 20% of it, and it doesn't seem likely that it will ever be more than that amount in the future.
The real question is: should I be putting some of the money currently in muni bonds into Treasury bonds to minimize default risk? Let's try to decide.
More information here:
What Bond Fund Should You Hold?
Are Muni Bonds Safe? The 2 Main Risks of Bonds
There are two main risks of bonds. The first is interest rate risk, sometimes called duration risk. This is the risk that your bond (whether owned directly or via a fund) loses value when interest rates go up. Since an investor could now buy a bond that is similar to yours but pays a higher interest rate, why would they pay the same amount for your bond? They wouldn't, not unless you discounted the price enough that the yield on the two bonds was equal. So, your bond falls in value until those yields are equal.
You minimize interest rate risk by limiting the maturity (and thus the duration) of your bonds. In my case, I only invest in bonds that are “intermediate” or shorter. For example, the average maturity of a bond in VWIUX is 9.7 years. Duration is related to maturity but basically tells you how much the value of the fund will drop in the event of a 1% increase in interest rates. The duration of this fund is 5.4 years, so if interest rates go up 1%, the value of the bonds in the portfolio will fall about 5.4%. Indeed, when interest rate risk shows up (such as in 2022), that is what happens. The total return of this fund for 2022 was a lousy -6.83% (in 2023, it rebounded to 5.9%).
The second major risk for bonds is default risk. This is when the person, company, or government that borrowed the money from you (remember that a bond is a loan) decides they're not going to pay you. They may pay you the interest they owe late. They may not pay back the interest at all. They may not even pay the principal of the loan back. All are considered a type of default. The less creditworthy the borrower, the higher this risk and the higher the interest rate charged. Thus, peer-to-peer loans may have interest rates (yields) of 20%-30%. Junk bonds might pay 7%. Corporate bonds might pay 5%. Treasuries might pay 4%.
The Default Risk of Municipal Bonds
What is the default risk of municipal bonds and what can be done to minimize it? From 1970-2022, the default rate on munis was 0.08%. That means 99.92% of municipal bonds paid their interest and principal as agreed. That's an incredibly low default rate. By comparison, the Treasury default rate was 0%; that's the gold standard. Corporate bond default rates vary from as low as 0.38%-1% for “investment grade” bonds to as high as 4%-49% for junk bonds. As you can see, the 0.08% muni bond figure is far more Treasury-like than corporate-like. Thus, for many years investors have simply treated muni bonds like they treat Treasury bonds, essentially ignoring the possibility of default. This is particularly easy to do when using a bond fund. VWIUX owns more than 13,000 different bonds. Who cares if 10 of them default? You're probably not even losing all of the principal on most of those 10. In comparison to the risk you're taking on the stock (equity) side of your portfolio, this risk can absolutely be ignored.
Or can it?
Allan and Bill are suggesting it can't. Their argument is primarily that municipal pension funds are dangerously underfunded and that this could result in the default rate among states and municipalities rising dramatically. Since you want your bonds to be there for you in the worst of times, this would suggest that you avoid those with default risk—or at least limit them in some way. Allan and Bill, though, seem to recognize that this risk is pretty low and that it just needs to be managed, not avoided altogether.
How Much Am I Getting Paid to Run This Risk?
It's not like I'm not getting compensated for taking on this risk. Let's run the numbers. Remember muni bonds are federal income tax-free, and Treasury bonds are state income tax-free. My marginal tax rates are 37% federal and 5% state. Yields of the Vanguard intermediate tax-exempt and Treasury funds on the day I wrote this article were 3.19% and 3.86%, respectively. After-tax, I'm being paid
3.19% * (1-5%) = 3.03% in the muni fund and
3.86% * (1-37%) = 2.43% in the Treasury fund.
I'm getting paid an additional 0.6% after tax to invest in munis and take on that default risk. Is it worth it? It absolutely is if the risk is 0.08%. But is the risk actually higher? It was back in the 1930s.
More information here:
Should I Use a State-Specific Municipal Bond Fund?
Municipal Bond Defaults in the Great Depression
There isn't actually a lot of data out there on this subject. One of the best sources I found was a thesis paper by Marc Joffe done as part of his MPA at San Francisco State University way back in 2013. Joffe notes that 4,800 municipal bond issuers defaulted on either interest or principal payments during the Great Depression. That seems like a lot, although I could not determine from the paper what percentage of the total was represented by that 4,800. I also couldn't determine definitively what percentage of the principal was recovered by the investors. I couldn't even find historical returns for muni bonds in the 1930s.
We do know how Treasury bonds and corporate bonds did, however.
Not too bad, right? If Treasuries and corporates did that well, it's hard to imagine that munis got killed. We also know what bond yields were in the 1930s:
Muni bond yields were basically 2%-4% while Treasury yields were also 2%-4% and corporate yields were 2.5%-5%. It really doesn't make sense that all of these yields were falling if the default rate was all that high. The classic study of this era was George Hempel's 1964 doctoral dissertation, “The Postwar Quality of Municipal Bonds.” He estimated that the total loss of principal and interest from muni bond defaults during the Depression years was about $100 million, about 0.5% of the total amount of outstanding state and local debt. That doesn't sound bad at all, although we have to recognize that this likely understates how it felt at the time. When a bond stops paying its coupon, you really don't know if it will ever start repaying, pay back what it missed, or even give your principal back. And you may not know for several years.
Joffe's thesis contains some interesting reading. There was a lot of muni debt as states and communities were building roads for those new-fangled automobiles. It peaked at about 35% of GDP in 1933. It is currently about 15%. There seem to have been two main causes of those defaults. The most important one was that banks were closed—sometimes for months or even permanently—and the states and municipalities had their cash in those banks. They couldn't pay the interest on the bonds—not because they didn't have the cash, but because they couldn't access the cash. This sort of scenario seems much less likely today given the changes in banking regulations and actions since that time.
Another factor was “tax rebellions.” Basically, people, en masse, refused to pay their property taxes—the major source of revenue for many municipalities. It turns out that most of those 4,800 defaults in the Great Depression were for little podunk towns, school districts, and special districts. Not big cities and states with immense power to tax their population. However, some of the larger and more spectacular ones were in Cleveland; Detroit; and, briefly, New York City. Entities in Chicago also defaulted. Each of these seemed to be precipitated by a spike in property tax delinquency rates.
Joffe explains:
“Although many of the property tax delinquencies were undoubtedly the result of economic distress, the early 1930s was also a period of organized tax revolts. This longforgotten tax resistance movement is described in David Beito’s 1989 book Taxpayers in Revolt. Beito argues that the resistance was in large measure a reaction to substantial increases in property taxes during the preceding decade. This increased burden was often accompanied by stable or falling property values, since the 1920s was a time of weak real estate prices. Beito traces the history of the property tax resistance movement in Chicago where anti-tax activism was most potent. The Chicago resistance was led by the Association of Real Estate Taxpayers (ARET), an organization originally formed by relatively affluent investors, but which later attracted broad support among the city’s skilled blue collar workers worried about maintaining their foothold in the middle class. At its peak, ARET leaders hosted a thrice-weekly radio program and the organization had 30,000 members. Beito also notes that tax resistance in Chicago and elsewhere became easier when the market for tax titles collapsed.”
There was such a glut of tax titles for sale that delinquent property taxpayers really weren't scared that their homes were going to be sold out from under them to investors willing to pay off the property tax bill, because there weren't any investors with any money. This loss of revenue was a big deal since 2/3 of the tax revenue for most big cities was from property taxes. It didn't help that cities had already lost another 5% of their revenue with Prohibition.
How Big of a Deal Are Underfunded Pensions?
Allan and Bill are worried that pensions are underfunded and that they're going to make states and cities default on their muni bonds in a general economic downturn. However, Joffe suggests this isn't a particularly new problem or even a difficult one to manage. As he writes,
“During the Great Depression, many retired government workers were eligible for pensions . . . Pensions were also an issue for some cities. Estimates published in Municipal Finance indicate that before the establishment of pensions, older municipal employees would continue to report for work even though they could no longer perform their jobs (at least not to the satisfaction of contemporary management). Supervisors, guided by a humanitarian impulse rather than a concern for the bottom line, were reluctant to fire these older employees. Administrators thus reached the conclusion that it would be less expensive to pension off the older workers at a percentage of their former salary. Many cities had not yet created pension funds and those that did often failed to make actuarially appropriate contributions.”
A 1937 National Municipal League Consulting Service survey of Atlanta’s finances reported serious underfunding in the city’s pension funds:
‘It is obvious from these figures that the firemen's fund with a cash balance of $491.38 is no fund at all. Nor are the reserves of either the general or police funds even a faint approximation of what they should be to guarantee the payment from the fund of its probable obligations . . . Firemen this year who paid money into their pension fund saw it go out again immediately to pay other firemen's pensions. Their sacrifice in no way built up for them any protection. They have in fact nothing to rely on but the naked promise of the city as their security for old age. We would recommend therefore that in all the pension funds the employee's contribution be treated as a trust fund and invested for him in securities or in the purchase of an annuity.'
That said the NML consultants were not advocates of full funding:
‘We believe on the other hand that it is not necessary for a public body deriving its income from taxes to accumulate a fund as if it were a private insurance company. Unless there are some predictable sharp upturns in the curve of natural retirement, there is no reason why the City should not pay pensions out of income. The integrity and solvency of the city should be a sufficient guarantee to the employee that the city will fulfill its pension contract. In fact, if the city went bankrupt, any fund it might have accumulated would probably disappear in the crash.'
Atlanta public employee pensions at the time were generous—at least by the standards of today’s private sector. Employees could retire on 50% of their salary after 25 years of service, regardless of age. Survivor benefits were also provided. Atlanta avoided default during the Depression and evidence reviewed thus far does not attribute any case of municipal default during the 1920-1939 timeframe to employee pensions.”
Despite the recommendation of the consultants, most states actually do have dedicated pension funds. As of 2022, this is where they stood:
Given the solid investment returns in late 2023 and into 2024, the current situation is likely even better than displayed here. That doesn't look too dire to me. I don't think I'm willing to give up an extra 0.6% return to decrease my exposure to that risk, especially compared to the other financial risks in my life (including equity risk and the dramatically higher entrepreneurial risks we face).
More information here:
I Bonds and TIPS: Which Inflation-Indexed Bond Should You Buy Now?
The Bottom Line
I'm never going to have more than Bernstein's 50% of bonds in munis because we've structured our bond portfolio as 50% inflation-indexed (TIPS and I Bonds) and 50% nominal. I'm a big fan of “taking my risk on the equity side,” but I'll be honest: I'm not seeing a reason to limit myself to Roth's 20% in muni bonds. If muni bonds skated through the Great Depression with a loss of only 0.5% of principal and interest, I don't have a lot of fear for a diversified portfolio of muni bonds just because Chicago can't manage its pension funds very well. Like most Vanguard bond funds, VWIUX limits itself to higher quality bonds: about 90% of the bonds are rated AAA, AA, or A, and 6% more are rated BBB.
I'm not going to stay awake at night worrying about muni default risk, so I might as well get that extra 0.6%.
What do you think? Do you limit how much you invest into munis due to fear of defaults? Why or why not?
Worry less about pension funding and more about climate risks.
Worrying about climate risk is silly. There isn’t any. Weather changes. Temps cool and rise. Remember in 92 we were told by 2010 there would be no more snows of Kilimanjaro? Or nyc would be under water? Or the Great Lakes dried up? The ptb use this to keep people scared and push whatever agenda they have, yet continue to build their mansions on the coasts. They know it’s nonsense.
Is WCI going to do anything about these blog and forum comments (like this one) that hijack threads with political rantings? I know the moderators just join in on the mud slinging.
There are no “moderators” outside of me and occasionally Josh (content director) on the blog comments. Are you thinking of the forum, Facebook group, or subreddit (all of which have moderators)? The general rule I follow is if you wouldn’t say it in my living room in front of my kids, you shouldn’t say it in the comments. Ad hominem comments tend to get deleted. But just a comment from someone who believes that the climate change we’re seeing is normal fluctuation? I’m probably not going to spend a lot of time dealing with that sort of thing.
When calculating after tax yield for the treasury fund, should one include NIIT (Net Investment Income Tax)? From what I can find, it appears it should be. If so, it would make the municipal fund even more worthwhile in this scenario. I would expect that if a municipal fund makes sense, then NIIT would also kick in. With a larger relative yield difference, though, it might matter.
Yes, I think it should be included.
Why did you use your full marginal tax rate for the treasuries? This may be a dumb question, but isn’t some of it taxed at ordinary/non-qualified and some of it at qualified (and much lower) rates?
Usually, decisions on the margin are based on marginal tax rates. At least that’s how it’s taught in microeconomics. While one might have an average tax rate based on their total tax and total income, this decision should be viewed on the margin, as the last dollar earned, and the associated tax rate for that dollar of income.
Treasury interest doesn’t get taxed at qualified rates. They are state tax free though.
I don’t worry. For my bonds, it’s 50% corporate (VCIT), 25% split between individual treasuries and G fund, and 25% state-specific individual munis, AA or AAA.
The term “municipal bonds “ might need a bit more definition. I believe the municipal bonds you are discussing are general obligations of the state or local government issuer that are supported by the full faith and credit of its taxing power. Other “munis” that are often swept into this term are revenue bonds that are nonrecourse to the state or local government issuer and are solely the obligation of a private entity (usually a corporation or LLC) that have the ability to issue bonds under state law for some purpose (e.g. pollution control or industrial development) that permits borrowing on tax exempt rather than taxable terms. There is a lot of junk in the revenue bond market sold as munis to make them appear benign and the recent rise in interest rates will make them tempting. Please have enough sense to not even attempt reading the fine print of those official statements.
Probably another good reason to only buy these through a good fund, like those at Vanguard.
Thanks for the deep dive on an overlooked topic.
Doctors tend to be in high tax brackets and have limited tax-advantage options, so munis make sense.
Diversification is always a good idea. But munis may be fairly safe. I understand Jack Bogle invested 25% of his portfolio in short-term munis & 25% in intermediate munis.
Thanks for the great research. I own state specific individual muni bonds through Nuveen, though, I am not sure the state tax savings are worth the 0.7% fees . The fund can be dialed to include high interest out of state muni funds that don’t appear to be too risky (transportation and infrastructure entities). Vanguard only has a few state specific muni funds, but expenses are only about .09% on their intermediate muni funds.
Been doing Munis since the 90’s. I have a dedicated financial adviser that buys bonds for me when I want to invest or reinvest when they mature. I’ve probably invested in several hundred municipal bonds over the years and not one default. I invest in individual bonds , not bond funds. If you hold them to maturity you get 100% of your investment returned, regardless of the interest rate climate at the time. Probably an investment that shouldn’t be traded back and forth, but if you have an adviser that knows that market I would consider them basically risk free. It’s a lot of fun seeing that huge tax free interest payment deposited into my account every month with absolutely zero sleep lost or worry on how the investment is fairing in whatever market climate we are in at the time.
I feel like that phrase “if you have an advisor that knows that market” can be a very dangerous one.
I have invested in munis ladders via Pimco and in multiple muni etfs and funds over many years.. It drives me nuts when someone says that 100% of your investment is returned with individual bonds. I would wager that you never purchased a bond at par. You may recover your purchase price if you sell before maturity if interest rates have decreased since previous purchase. Otherwise when a bond matures par value is paid , NOT your investment amount.
Funny kind of axe to grind, but that is correct. If a bond is purchased at its original face (par) value, you’ll get par plus the coupon back at maturity. If a bond is bought on the secondary market (or at least not at issuance), you’ll get par back plus any coupon due you.
Jim excellent discussion as always! I’m unfortunately in the state of NJ, and I had considered using a NJ specific muni bond fund from Vangaurd in the past. given the poor funded pension obligations you mentioned in NJ, is the risk magnified where you think it’s not prudent to use this fund?
I don’t know the answer to your question but that fund has $2.4 billion under management.
If there is safety in numbers those are the kind of numbers I’d look for.
Hey Jim,
We’ve interacted before about individual muni bonds on a previous post. I know you don’t like buying individual bonds and that’s fine but maybe you can help us who do want to buy individual muni bonds. I have read a few books about muni bonds and feel I know more than your average WCI investor about that topic. But what I cannot find is how to gauge the default risk of these individual bonds.
How do experts do it? Aside from looking at whether it’s a GO bond or a recent bond and the underlying bond rating, how does one truly assess the default risk of each bond? I’m leary of trusting the bond rating agencies blindly after the GFC. Your local financial advisor isn’t going to know how to do this. So who does?
It would help if you had a muni bond expert on the pod! Thanks!
If you’re going to hire an expert, why not just hire the one running a Vanguard bond fund?
At any rate, to answer your question you can look at ratings or do what the ratings companies do which is dig into the finances of a given municipality or state.
Sounds like a big pain just to avoid paying a handful of basis points to a bond fund manager.
To assess default risk, you’ll have to run the numbers a la Benjamin Graham. If you squint at Moody’s and S&Ps ratings, only way to judge default risk is look at the numbers yourself. But given the “ease” with which governments publish reliable data about the specific municipal structure, it’s income, obligations (funded or otherwise), and any other backing (i.e. a sewer utility backed by the county), you’re probably better off buying a fund than individual munis.
Bernstein’s newest book, he recommended 1/3 of Bonds in municipals at maximum.
This is from the last chapter.
“If you feel compelled to only municipal bonds, limit them to no more than 1/3 of your fixed income assets. “
This is what I did with my permanent fixed income portfolio. I use the long-term municipal bond fondant Vanguard, the durations is really not that long.
I’m not sure the risk is all that high, but my muni bonds probably are about 1/3 of my fixed income anyway so I guess I am adhering to that rule of thumb.
Interesting that the duration for the LT fund is only 7.9 years. The intermediate fund I use is 5.4 years. The LT treasury fund is 14.8 years.
Exactly and you are getting paid for those extra years. I can’t remember what Larry swedroe’s rule of thumb is off hand, but it met his rule for getting paid for every extra year of duration so I pulled the trigger. Also, my personal investment Horizon is much longer anyway.
My question with municipal bonds is whether there is a new and unprecedented threat to municipal revenue called, “the hollowing out of downtown office buildings as companies reset their real estate footprints in response to long term hybrid work norms”. It seems like a slow moving train wreck—today’s 1/2 empty office will eventually translate to the company occupying a 50% smaller office space, when its lease is up. Multiply that times all of American downtown office buildings, over the next 5+ years as all those leases are up for renewal, and don’t we have a recipe for massive defaults in the loans undertaken to build those buildings, and ultimately for massive reductions in municipal tax revenue as the value of the downtown tax base associated with those buildings and companies falls by 50 percent? I am not clear enough on the relationship between municipal tax revenue and property taxes on downtown offices to know how all this would play out. I do, however, think it is a very real possibility that over time, the square footage leased by office-based businesses in the urban core of the United Stares will fall dramatically, and that seems like it could have significant consequences m. I would be grateful if you could help shed light on these dynamics, as it is often the thing that hasn’t happened previously/for which there is no precedent that catches us by surprise in the financial markets. (If you include municipal money market funds, we have about 1/3 of our bond holdings in munis so I have obviously not acted on these concerns but they are concerns!)
Municipal bonds aren’t generally used to pay for office real estate. This isn’t something I spend time worrying about. If you are invested in office real estate it’s worth worrying about though.
I mean, yes, if the entire economy melts down and there is a massive impact on municipal tax revenue it could affect the ability to pay bonds back and pay interest on them, but I don’t think the property taxes on office buildings is some massive chunk of most municipal revenue.
Hello – just starting to be in a phase in my career to think about some of these concerns brought up. Just starting to think about Municipal Bonds.
I am sure this is a very simple question that highlights my naïveté on subject – but would investing in a municipal bond money market fund like Vanguard be a simple approach to entering into the Muni world and offer some more protection while giving the same tax benefits? Do the individual Muni bonds vary that much from bond to bond on interest paid to really warrant all the extra work to invest in individual bonds? Thanks!
Yes, a muni MMF owns very short term muni bonds. Same tax benefits, no interest rate risk. In typical times, the yield is lower though. IMHO the effort to buy individual bonds isn’t worth the squeeze, but there are some diehard people out there who feel otherwise.
I really enjoyed this muni bond article. I personally have a very small position in muni bonds (my risk appetite means I have almost all equities). However, I am one of the weird ones who enjoys learning about them and am strongly convinced you can do very well with individual bonds (but it requires a tremendous amount of work unless you are investing during a liquidity crisis–then it is hard to miss if you have the requisite knowledge). Here is the median bond in my portfolio return-wise–look it up on EMMA (CUSIP 57586NHA2) and see my purchase on March 30th 2020 @99.874 and see it last traded 8/6/2025 for 100 (a return of just north of 5.3% tax-free with AA- credit rating)…likely higher than any muni bond fund on the planet over this time frame)…the overall return across this portfolio has been slightly north of 5% annual with lower credit risk, higher call risk, lower interest rate risk, lower liquidity risk, and higher single issuer risk than the broad muni market…basically, you must fully understand each of these risks and how they are priced in the market to do well (ideally, you would also select those risks that fit the rest of your portfolio and your life). If you don’t want to do the work, it is reasonable to use a Vanguard fund. Also, to assuage those who believe this is not repeatable…I purchased $30k of this CUSIP today for a family member: AAA-rated 64985HTA5 and it will likely return in the high 4% range and will outperform the broad muni market on a go-forward basis by approximately 0.5-1% annual (I bought two other AAA-rated bonds today at $30k apiece with a similar expected return). Someone can put that CUSIP into EMMA in 5-10 years and see whether I am correct. **If we use the Bloomberg Muni Bond Index as a comparator, my muni bond portfolio has returned around 4.9% more annually over the last 5 years…caveat: this performance would be hard to achieve if I were investing more than ~$10 million due to liquidity constraints**
It might be worth subtracting the value of your time managing this bond fund of yours from your returns. 🙂
This is pretty germane to the topic here. Long story, a bunch of croo…politicians did some crooked deals and borrowed to both line their own pockets and refit a lot of sewer infrastructure in the county. Basically, the economic tide went out, and they got caught. The county had to restructure the debt of its sewer system’s bonds, and some of the bond holders had to eat up to 30% of the par value of the bond.
https://archive.nytimes.com/dealbook.nytimes.com/2013/06/04/a-county-in-alabama-strikes-a-bankruptcy-deal/#:~:text=Jefferson%20County%2C%20Ala.%2C%20took%20a%20big%20step%20toward,debt%20at%20the%20heart%20of%20its%20financial%20breakdown.
Thanks for sharing. A good example of why diversifying into thousands of muni bonds using a fund is helpful.
Where did you get this stat from?
“From 1970-2022, the default rate on munis was 0.08%.”
the source is not quoted in your article….
This is an important topic. Thanks for sharing your perspectives.
I don’t recall. I guess I should have linked to it when I wrote it. A quick Google search suggests I found it here:
https://www.vaneck.com/us/en/blogs/municipal-bonds/muni-defaults-just-one-in-2022/#:~:text=Muni%20Bond%20Defaults%20Remain%20Rare&text=While%20the%20average%20five%2Dyear,6.9%25%20since%201970%2C%20respectively.
I retired still living in California what would be good plan to allocate to different options for income using one million ? Thanks
It sounds like you need a written financial plan. This post should help:
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
Maybe this one too:
https://www.whitecoatinvestor.com/the-pros-and-cons-of-income-investing/
and possibly this one:
https://www.whitecoatinvestor.com/how-to-spend-in-retirement/
If you still have questions after reading those, let me know.
Good discussion I am just seeing now a few months later. All of this, of course, depends on one’s personal financial situation. In my case, I only hold individual muni bonds rather than bond funds. I have a large enough portfolio of munis that I do not worry about default risk (as an aside I worked on the Jefferson County Chapter 9 debacle – – the sewer bonds were revenue ones but holders had losses on GO bonds also under the confirmed plan of reorganization). I hold to maturity and clip coupons, which cover my retired life when combined with my pension. 2024 was a good time to load up on muni bonds and I remain permanently in the top tax bracket so just make the most sense for me – – I hold some corporate bonds in retirement accounts, and where my only equity exposure resides). I do not pay attention to “value” fluctuations in the market and focus on the par value of my holdings given I hold to maturity. A bond fund is fine and an easier entry point into muni bonds, but also would have fluctuations in value with the ups and downs of the market generally – – but if long term holder not really an issue. I am fine paying the higher fee (35-40 basis points) to the two firms where i have muni accounts for the active management they provide. This is all a function of my particular circumstances and no approach fits all investors – – I focus on capital preservation because I do not need to grown my assets/wealth during the balance of my life, and content with 20-25 % stock and equity like investments. Thanks again for the discussion.
Thanks for sharing your experience.
I hold a significantly greater percentage (80%) in individual municipal bonds. You get what you pay for. For example. Take Texas school district bonds backed, principal and interest, by the Texas Permanent School Fund. I choose Texas schools individually rated in the AA category, usually with excess reserves above 25%, backed by the TPSF. The fund was established in 1854 and currently holds $64 billion in assets. There has never been a claim against the fund in 171 years. Or the Utah schools guaranteed by the AAA State of Utah School Fund (backed by the AAA State of Utah) for interest and principal. Never had a claim against it. Or the State of Nevada Permanent Fund guaranteeing school bond debt. Or one of the other 5 states that guarantee school bond debt. Or one of the 3 states that have state appropriations backing school bond debt. Or buy Escrowed or Pre refunded bonds backed by Treasuries, Refcorp, SLUGS, Agencies, etc.. There are dozens of other similar scenarios that I could point out. Default risk? If these defaulted we’re going to be in a guns, gold and butter world. Forget about investing.
HI Jim,
How do you look at the municipal bond market now?
I had almost 80% of my bond in municipal bond fund (vanguard intermediate term and long term).
The market now (4/12/2025) makes me feel so depressed.
Muni fund had much higher drop in value compared to other bond fund.
I don’t have a need for cash now or anytime soon but thinking about selling some of them to feel better.
But I also know I won’t feel better because selling means losing.
Do you think muni fund can recover in the next 5 to 10 years?
Thank you!
Helen-
If selling low makes you feel better, I would suggest not looking at your investments very often and/or hiring a financial advisor to help you stay the course with your plan. Here’s our list of recommended advisors:
https://www.whitecoatinvestor.com/financial-advisors/
I actually have no idea what my muni bond funds have done in the last week or two. I guess I have to look to respond to your question.
VTEAX is down 3.17% on the year and 3.75% in the last week. Meanwhile, the stock market is going up and down 4-10% a day. My bonds are feeling pretty safe to me compared to that.
But if you want the safest possible fixed income option, put your money into a treasury money market fund. If you want to chase yield just a little bit more, consider short term treasuries. You can buy them individually if you want, or use a fund for convenience. But if you take slightly more risk by using munis and extending duration a bit, expect the additional risk you’re running to show up every now and then like it did this week and in 2022.