Muni Ladders: Tax-Free Income with Protection from Rising Rates
A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise, and as interest rates rise, the prices of debt securities tend to fall. Income from municipal securities may be subject to the alternative minimum tax. Federal, state, and local taxes may apply. There is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-exempt income. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. No investing strategy can overcome all market volatility or guarantee future results.
This material is provided for general and educational purposes only. The examples provided are hypothetical, are for illustrative purposes only, and are not indicative of any particular investor situation.
There is no guarantee that markets will perform in a similar manner under similar conditions in the future.
Diversification does not guarantee a profit or protect against loss in declining markets.
The Bloomberg Daily Generic OAS Yield Curve details yields on general obligation municipal bonds at various maturities and credit qualities. It is comprised of contributed pricing from the Municipal Securities Rulemaking Board, new issues calendars, and other Bloomberg proprietary contributed prices.
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
A basis point is one one-hundredth of a percentage point.
A bond ladder is a technique for reducing the impact of interest-rate risk by structuring a portfolio with different bond issues that mature at different dates.
A general obligation bond (GO) typically refers to a bond issued by a state or local government that is payable from general funds of the issuer, although the precise source and priority of payment for general obligation bonds may vary considerably from issuer to issuer depending on applicable state or local law. Most GO bonds are said to entail the full faith and credit (and in many cases the taxing power) of the issuer, depending on applicable state or local law. GO bonds issued by local units of government often are payable from (and in some cases solely from) the issuer's ad valorem taxes, while GO bonds issued by states often are payable from appropriations made by the state legislature.
Yield is the annual interest received from a bond and is typically expressed as a percentage of the bond's market price.
The credit quality of the securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.
The opinions in Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.