The basics of investing in municipal bonds

The municipal bond market is unlike any other fixed-income market in numerous ways. It’s a $4 trillion market with millions of individual bonds and credits that trade on an over-the-counter market, which means there is no centralized market like Treasury or corporate bonds. The tax-exempt nature of its dividend stream also adds another layer of confusion as the returns may seem lower, but to the tax-savvy investor, the tax-exempt status offers great value. Additionally, the historical credit quality of the municipal bond market has been strong with a lower default rate than corporates and fewer rating downgrades.

The Positive and Negative Aspects of an Over-the-Counter Market

An over-the-counter market simply means there is no centralized trading platform. When an investor wants to buy an equity, they just call their advisor and put in an order. The order is then transmitted to a market maker in the security and executed. Buying a municipal bond is much more complicated as there are millions of different bonds and no centralized market maker.

 

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