Municipal Bond Investment Insights


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


   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.


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



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



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




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.


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.