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Municipal bonds are among the least-known government issues in Canada, yet, paradoxically, they are among the best-yielding and most secure issues on the market.
“Munis” are obscure in spite of their merits. They represent about 2% of the SC universe bond total return index, the leading bond index in Canada, says Stephen Ogilvie, who heads Standard & Poor’s Corp.’s municipal bond finance desk in Toronto. The issues tend to be bought by institutions, but underwriters often reserve allotments for retail clients.
Munis are rare for the same reason that they are attractive, says Ogilvie: “The explanation for why there is not as much depth in the Canadian municipal bond market as there is in the U.S. is that Canadian municipalities are averse to debt. Their global peers, including those in the U.S., borrow much more.”
As well, he notes, in contrast to the U.S. bond market, in which municipal bonds are immune to certain income taxes, Canadian munis’ interest is taxed as straight income, just like for any other bond. And there is no special tax regime to create a special, tax-free market for munis in Canada.
Buyers of municipals are the usual suspects — pension funds and life insurance companies. They usually hold them to maturity because most of the issues are small, thinly traded, and have premiums for their lack of liquidity. The liquidity premium tends to be built into each issue as a small boost on yield of one or two basis points, says an investment banker who handles these bonds. The market may discount the bonds a little more, adding two to six more bps of yield to the built-in premium. But try to sell most of the issues, and the yield premium you received as a buyer will be lost to the next buyer, who will want his or her own “liquidity discount.”
Basics of Bond Investing
Bonds are a form of debt issued by a company or government that wants to raise some cash. In essence, when an entity issues a bond, it asks the buyer or investor for a loan. So when you buy a bond, you’re lending the bond issuer money.
In exchange, the issuer promises to pay back the principal amount to you by a certain date and sweetens the pot paying you interest at regular intervals
Interest Rate Risk
When you buy a bond, you commit to receiving a fixed rate of return (ROR) for a set period. Should the market rate rise from the date of the bond’s purchase, its price will fall accordingly. If you sell it in the secondary market, the bond will then trade at a discount to reflect the lower return that the buyer will make on the bond. This is why interest rates are said to have an inverse relationship with bond prices.
Is Munibondca a Good Investment?
Munibondca tends to be less volatile than stocks and is typically recommended to make up at least some portion of a diversified portfolio. Because bond prices vary inversely with interest rates, they tend to rise in value when rates are falling. If bonds are held to maturity, they will return the entire amount of principal at the end, along with the interest payments made along the way. Because of this, munibondca is often good for investors who are seeking income and who want to preserve capital. In general, experts advise that as individuals get older or approach retirement, they should shift their portfolio weights more toward bonds.
Municipal bonds (“munis”) are debt securities issued by state and local governments.
These can be thought of as loans that investors make to local governments, and are used to fund public works such as parks, libraries, bridges and roads, and other infrastructure.
Interest paid on municipal bonds is often tax-free, making them an attractive investment option for individuals in high tax brackets.
General obligation (GO) munis provide cash flows generated from taxes collected on a project.
Revenue munis return cash flows generated from the project itself.