2. Municipal Bonds (2% - 3%)
What are they?
Muni bonds are IOUs issued by state and local governments in the U.S. Their interest income is free from federal taxes, and for bonds issued in your state of residency, free from state and local taxes as well.
What are the risks?
In the rush for safe havens, investors snapped up Treasuries but not munis, Muni ETFs began trading at unprecedented discounts to their NAVs.
The longer the pandemic drags on and the deeper the recession, the more financial stress the state and local governments will feel, and munis from some sectors will be impacted.
Look for the muni bonds' durations. For example, if a bond fund's average duration is 5, it means if interest rates were to rise by 1%, its value would decrease by 5%.
Examples
National muni funds such as Fidelity Intermediate Municipal Income (FLTMX) and Vanguard Intermediate-Term Tax-Exempt Bond (VWITX).
In next blogpost, we will discuss Investment Grade Bonds.