Municipal Bond Investment Insights

INCOME DRIVES RETURNS FOR MUNI INVESTORS

While some municipal bond managers may use leverage and derivative instruments to drive returns, at Franklin, we focus exclusively on maximizing monthly tax-free income for our investors through a conservative approach. Historically, income has been the primary driver of municipal bond total returns, contributing more than price appreciation over the long-term. Please remember, past performance does not guarantee future results.


Income: An Important Component of Total Return
Bloomberg Barclays Municipal Bond Index
20-Year Period Ended December 31, 2018

% OF TOTAL RETURN

   Income...............................................102.6%
   Appreciation on Initial Investment............-2.6%

© 2018 Barclays Live. Bloomberg Barclays, 12/31/2018. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. All rights reserved. The information contained herein: (1) is proprietary to Bloomberg Barclays and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Bloomberg Barclays nor its content providers are responsible for any damages or losses arising from any use of this information. Total return includes compounded income and capital appreciation or depreciation. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.

4 REASONS TO INVEST IN MUNIS NOW

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 2017.1

U.S. Municipal Bond Issuance3,4
2006-2016 (in Billions)

New Money

Refunding

Combined

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 December 31, 2018. 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 Strong2,5
Yield-to-Worst as of December 31, 2018

Tax Equivalent Yield

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 December 31, 2018

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 Rates6
1970-2017

  1. Source: JP Morgan. Most recent data available.
  2. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable.
  3. Source: Bond Buyer. Refunding is a refinancing of existing “refunded” bonds with new “refunding” bonds.
  4. Combination issuance indicates that a deal contains a combination of both new and refunding issuance.
  5. Source: 2018 Morningstar (BofA Merrill Lynch Current US Treasury (10-Y) Index, Barclays Municipal Bond (AAA) Index, Barclays US Aggregate Corporate (A) Index, Barclays Municipal Bond (A) Index, Barclays US Aggregate Index, BofA Merrill Lynch US Corporate Index, Barclays Municipal Bond Index, S&P 500 Index, Bloomberg Commodity Index.). Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. See franklintempleton.com/datasources for additional data provider information. The yield to worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. The tax-equivalent yield is used by investors to compare taxable and tax-exempt securities after accounting for federal taxes (excluding AMT). For this comparison, we used the maximum tax rate of 39.6%, plus the 3.8% tax from the Affordable Care Act.
  6. Source: Moody’s Corporation. Most recent annual data available. A speculative-grade bond has a rating of lower than Baa, an investment-grade bond has a rating of Baa or higher.
  7. Municipal Bonds are represented by Bloomberg Barclays Municipal Bond (AAA) Index, US Stocks are represented by S&P 500 Index, commodities are represented by Bloomberg Commodity Index, US Corporate Bonds are represented by BofA Merrill Lynch US Corporate Index, US Treasuries are represented by BofA Merrill Lynch Current US Treasury (10-Y) Index.

Expertise

Strength

Opportunity

Franklin Templeton

  • Income Focused: Our managers focus on maximizing monthly tax-free income for shareholders. Historically, income return from municipal bonds has contributed much more to municipal bond total returns than changes in municipal bond prices. This aligns with the reasons investors choose to invest in the category, for income and diversification.
  • Conservative Approach: We adhere to a conservative approach to generate tax-free income for shareholders. Consistent with this approach, Franklin tax-free income funds do not use leverage or invest in derivatives, which can increase volatility in municipal bond portfolios.
  • Strict Credit Analysis: Our research analysts conduct exhaustive research to find what they consider attractively valued issues for our portfolios. They are responsible for evaluating an issuer’s credit strengths and weaknesses and recommending fund purchases to portfolio managers. Part of their evaluation process includes stress testing credits—to determine an issuer’s ability to make bondholders whole in the face of potential declines in revenues, land values, or populations and other negative pressures.
  • Long Term Investment Horizon: Since we’re focused on maximizing income, we don’t actively trade bonds to try to capture capital gains. We typically sell holdings only if we see an opportunity to enhance a fund’s portfolio structure or its income-earning potential. Our buy-and-hold strategy and our large asset base have helped to keep fund expenses relatively low.
  1. As of 12/31/2018.

FRANKLIN TEMPLETON MUNICIPAL BOND FUNDS

Today, we are one of the largest municipal fund managers in the nation with $63 billion in municipal bond assets under management as of 12/31/2018. Our reputation and sizeable assets under management gives us access to almost every new bond issue.

We offer one of the industry’s largest municipal product lines with over 30 strategies that focus on all major areas of the market.

See a full list of Franklin Templeton Municipal Bond Funds.

Important Legal Information

What Are the Risks?

All investments involve risks, including possible loss of principal. Because municipal bonds are sensitive to interest rate movements, the fund's yield and share price will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the fund adjust to a rise in interest rates, the fund's share price may decline. Puerto Rico municipal bonds have been impacted by recent adverse economic and market changes, which may cause the fund's share price to decline. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond's issuer, insurer or guarantor, may affect the bond's value. The fund may invest a significant part of its assets in municipal securities that finance similar types of projects, such as utilities, hospitals, higher education and transportation. A change that affects one project would likely affect all similar projects, thereby increasing market risk. By clicking on the fund name, you will be taken to a more detailed fund information page which includes main investments and risks.

To view the latest publicly disclosed Puerto Rico holdings information, please click here.

Your clients should carefully consider a fund’s investment goals, risks, charges and expenses before investing. Download a prospectus, which contains this and other information. Your clients should read the prospectus carefully before they invest or send money.

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Franklin Templeton Distributors, Inc.