Municipal Bonds Are Back Out Of Favor

Tuesday, December 21, 2010 00:46
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Municipal Bonds Are Back Out Of Favor

Investors have been fleeing municipal bond funds on a combination of factors, but advisors should understand what's going on in these clients' minds.

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The tax situation is immediately obvious. If the tax cuts will continue into next year -- if not beyond -- then as tax-advantaged instruments, muni bonds become less appealing in a relatively low-tax environment.

But psychology is also an issue. As investors flee the prospect of higher default risk in the asset class, some are dumping munis indiscriminately. While the prospect of failure is in the air, it is unlikely that many of these quasi-government issues will be allowed to fail.

If muni bonds make sense for a client, then it may be in the advisor's best interests to express the situation in as detailed a faction as possibile.

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