Muni bonds have performed well in volatile times

February 3, 2016 02:02 PM

Like Winter Storm Jonas, which has disrupted life on the East Coast with up to 30 inches of snow in some cities, strong levels of volatility are sweeping through global markets, from the United States to China. The Shanghai Composite Index closed at a 13-month low on Tuesday, while the S&P 500 Index has lost over 7% year-to-date.

And with more storm clouds brewing on the horizon, many investors are looking for ways to help them batten down the hatches.

Many investors, sensing additional risk in stocks, have been able to find shelter in municipal bonds, which in the past have provided a certain level of stability in times of turmoil. It’s important to be aware, though, that interest rates and bond prices have an inverse relationship. When one rises, the other declines, and vice versa.

Munis also come equipped with attractive tax advantages, shielding investors from taxes at the federal level and often at the state and local levels too. That means they can help “Obamacare-proof” your interest from the 3.8% Affordable Care Act (ACA) tax on investment income (applicable to those who make more than $200,000 in taxable income per year).

In 2015, munis, as represented by the Barclays Municipal Bond Index, were actually the top fixed-income asset class, beating both Treasuries and corporate debt. But they also outperformed S&P 500 stocks, gaining more than double what equities delivered.

 

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About the Author

Frank Holmes is CEO and chief investment officer of US Global Investors. This first appeared in his Frank Talk blog. For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow on Twitter at www.twitter.com/USFunds or like on Facebook at www.facebook.com/USFunds.