Municipal Bond Investment Insights


In today’s low interest rate environment, some income-seeking investors have turned to municipal bonds due to their potential to offer both tax-advantaged income and preservation of capital. Franklin has been managing tax-free income funds for nearly 40 years, utilizing a team of 32 investment professionals which offers, in our view, an expert perspective on the municipal bond market. Today, we’re one of the largest municipal bond fund managers in the nation1, and have more than $71 billion in municipal bond assets under management.2


1. Plain Vanilla Approach — Which Means No Leverage, No Derivatives

Since municipal bond funds typically represent the more conservative component of an investor’s diversified portfolio, Franklin does not invest in derivatives, use leverage or make outsized sector changes, all of which can potentially increase volatility in municipal bond portfolios.

2. Focus on Monthly Tax-Free Income

Our managers focus on maximizing monthly tax-free income for our shareholders. Historically, income return from municipal bonds has contributed much more to municipal bond total returns than changes in municipal bond prices. Additionally, our managers generally work to minimize fund exposure to bonds with income subject to the alternative minimum tax.3

3. An Industry Leader

We believe our solid reputation and significant asset base are advantages when negotiating terms for municipal bond transactions and finding opportunities to participate in new bond offerings. As a large institutional investor, we’re able to purchase bonds at prices generally lower than what is available to the average individual investor and then pass on the savings to our shareholders.


1. Low supply should help buoy municipal bond prices

Recent new muni supply has been constrained, as shown by the dark blue bars below. And supply is forecasted to remain low through at least 2017.4

U.S. Municipal Bond Issuance5,6
2006-2016 (in Billions)

U.S. Municipal Bond Issuance

New Money



2. Municipal bonds have provided more income recently than other bonds

Munis provided a higher tax-equivalent yield than most other types of bonds, as of March 31, 2017. Given current tax rates, the tax-free benefit of munis makes them very attractive. Use our Taxable-Equivalent Yield Calculator.

Municipal Bond Yields Have Remained Strong3,7
Yield-to-Worst as of March 31, 2017

Municipal Bond Yields Have Remained Strong

Tax Equivalent Yield



Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. Past performance does not guarantee future results.

3. Municipal bonds may add an additional layer of diversification

Like other bonds, munis have had a low correlation to stocks, and in some cases negative. But munis may also offer an additional benefit — they’ve had a lower correlation to other types of bonds, as well.

Municipal Bond Correlations With Various Asset Classes7
5-Year Period Ending March 31, 2017

Municipal Bond Correlations With Various Asset Classes

Correlation is the statistical measure of the degree to which the movements of two variables are related; 1 = perfect positive correlation, 0 = no correlation, and -1 = perfect negative correlation.

4. Municipal bonds’ historically lower default rate may mean less risk than other types of bonds

Aside from the few cases of potential defaults focused on by the media, munis have historically had a very low default rate compared to other fixed income investments.

Average Cumulative 10-Year Default Rates8

Average Cumulative 10-Year Default Rates