Municipal Bond Funds

What Are Municipal Bonds?

Municipal bonds, or munis, are debt securities issued by states, counties, cities, agencies and local districts to finance capital and infrastructure projects, such as roads and bridges, schools, administrative buildings and other public projects. Interest on most municipal bonds is exempt from regular federal income tax in addition to the state and local income taxes in the state or locality where they are issued.1 Some municipal bonds are also exempt from income tax in other states.

Why Invest in Municipal Bonds?

Muni bonds historically have had very low default rates compared to other types of bonds because they are issued by governments or their legal authorities. This has made them a compelling choice for investors seeking a reliable source of income that is also usually free from regular federal income tax. On an after-tax basis, municipal bonds typically yield more than taxable alternatives.

Types of Municipal Bonds

Franklin Templeton offers national and state-specific munis. Each possess their own characteristics, level of risk and tax treatments.

Tax-Free Munis

  • General obligation (GO) bonds: “GOs” are backed by the “full faith and credit” of the issuer, such as a state or city, meaning it can levy taxes as much as necessary in order to pay interest and principal on the bonds. In most cases, interest on GO bonds is payable first before any other obligation.
  • Revenue bonds: Interest on these bonds is backed by the revenues from a specific public project, such as a toll road, electric power plant, or water and sewer facility. These bonds usually pay higher interest rates than GO bonds.

Taxable Munis

Some muni bonds aren’t eligible for a federal tax exemption because they exceed Internal Revenue Service limits on private business use or private security or payment tests. However, they are typically still exempt from state and local taxes. Examples include bonds issued to finance local sports facilities, some types of housing, refinancing debt, or to finance shortfalls in state and local pension funds.

Taxable muni bonds generally yield more than comparable U.S. Treasury bonds and some corporate bonds while benefiting from state and local tax exemption.

1. For investors subject to the alternative minimum tax, all or a portion of the interest may be taxable, depending on the investment. Distributions of capital gains are generally taxable.


Bond Funds or Individual Bonds?

Just as equity investors can invest in individuals stocks or in stock funds, muni investors have the option of buying individual municipal bonds or muni bond funds. Both options have their advantages and disadvantages.

Muni funds generally offer a wide diversification of credit risk, an important consideration when investing in debt securities. Individual bonds often must be purchased in large dollar amounts, which may potentially put them out of reach for certain investors, while bond funds can be purchased at a relatively small minimum investment.

Depending on the issuer, individual bonds may be difficult to sell prior to maturity, which may negatively impact the price received. Bond fund shares, by contrast, can usually be sold daily (or intraday in the case of ETFs2) at the prevailing market price. Bond funds may also benefit from professional investment management.

2. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns.

Our Approach To Municipal Bonds3

Income Oriented

Our managers focus on maximizing monthly tax-free income for shareholders.

Active Management Matters

An active, research-driven approach is critical given the vast size, nuance and complexity of the municipal market with approximately 100,000 municipal issuers and 940,000 outstanding bond issues.

Conservative Philosophy

Our managers believe in managing risk by building well diversified portfolios and do not use leverage and derivatives which cause unnecessary volatility in portfolios.

Strict Credit Analysis

Our research analysts conduct exhaustive research of the entire municipal bond landscape, to determine an issuer’s ability to make bondholders whole in the face of potential negative pressures.

Experience and Expertise

With more than 40 years of municipal bond investing experience and a seasoned team of over 30 investment professionals, we have one of the largest and most tenured teams in the industry.

3. Information as of 3/31/2020.

Our Latest Thinking

Explore our latest insights and commentaries on the municipal bond space

Meet Ben Barber, Franklin Templeton’s new Director of Municipal Bonds. In this short video, hear his latest thoughts on today’s municipal bond market and opportunities going forward.

Insights

Our Municipal Bond Strategies

Franklin Templeton is one of the largest municipal managers in the nation. Over 30 tax-free strategies cover all geographies and the full credit quality spectrum and are available through mutual funds, ETFs and SMAs.

See a full list of Franklin Templeton Municipal Bond Funds.

How Do I Buy Municipal Bond Funds From Franklin Templeton?

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