Business Transformation

A Discussion of the Benefits of Municipal Bonds in Recession

Alan Appelbaum

I have had the pleasure of helping many people find high-quality investments during challenging times to turn their life around when they need it the most. For example, the coming recession has a lot of people needing guidance on what to do with their money or where to invest it to ensure that they keep making a steady income. He believes that municipal bonds have major benefits during economic slumps.

Why Municipal Bonds are Wise

Over the years, I have advised many people on municipal bonds, even outside of a recession. They’re simply one of the best options for stable growth and rarely experience the problems other investments face during a recession. Understanding why this is the case is important because it may help you ride out the recession without experiencing any financial issues.

For instance, municipal bonds come with significantly lower default rates compared to other bonds. Their five-year all-rated default rate from 1970 to 2020 is just 0.08%. That’s much lower than the default rate of corporate bonds, which default at 6.89%. Why is that a significant benefit? It indicates that your investment is safe and isn’t likely to disappear on you out of nowhere.

That kind of stability is critical during the challenging times of a recession. These steady earnings keep people like me repeatedly returning to municipal bonds. Unlike other bonds, they’re simply stable, easier to trust, and capable of long-term stability that you can’t get from other types of bonds.

Just as importantly, they are some of the easiest bonds to find and among the best for patient investors. For example, they provide tax-free interest, meaning they are exempt from federal taxes. If you buy them in your state, you might even get exempt from state taxes. As a result, more of your money stays in your bond and minimizes your chance of loss while you own it.

Some municipal bonds have good yields, with as high as 3% or 4.62% on some bonds. While that’s not as much as some high-yield bonds, municipal bonds are more stable and consistent. You’ll get a regular payout with these bonds, typically twice per year. That makes them a great option for people who need a shot of tax-free income that can help them survive in a recession.

When buying these bonds, I suggest looking for AAA bonds, as these are among the stablest and best paying. While those below BB may pay more, they are riskier. Known as junk bonds, they can be a good balance for a financial portfolio and provide a potential for a higher payout. During a recession, though, they may be too risky for many people.

That’s why anything lower than that may put your finances at risk. Even better, you’ll come out of the recession with a good and steady income source that may give you the edge you need to avoid financial problems.

Written by Alan Appelbaum.
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Alan Appelbaum
Alan Appelbaum is a former educator and longtime bond industry professional. Appelbaum served as the President of H.J. Sims & Co. from 2002 to 2007.

Alan Appelbaum is an opinion columnist for the CEOWORLD magazine. Connect with him through LinkedIn. For more information, visit the author’s website CLICK HERE.