Personal Finance & Money Asked by Hammerhead on February 2, 2021
Why is municipal bond stock behavior virtually the same, regardless what state or fund you look at?
For example, one can look at shares of the following mutual funds, each collecting municipal bonds from Maryland, Michigan and California respectively: MDXBX, FMHTX, BCHYX.
One would think that bonds from these different states should have nothing to do with each other, yet the share price fluctuations are virtually the same, regardless what period you look at.
There has to be a simple reason behind this, but what is it?
Municipal bonds have relatively low risk of default, since they are often backed by tax revenue or revenue from specific projects (e.g. a toll road), so their yield is usually similar regardless of the state/city/etc. that issues it.
Historically they have run fairly close to federal bond yields of similar duration, but the COVID crisis has enhanced the risk of municipal bonds over the past few months such that municipal bonds have gotten slightly higher yields. That's why you see a drop in these funds in mid-March followed by a slow recovery.
Individual areas can have some credit risk, but it's generally for short periods of time (unlike a company that goes bankrupt and never pays back the debt that is discharged). Municipalities can also issue bonds that have conditions such as optionality and conversions that can enhance yields, but for a broad bond fund those should be exceptions and shouldn't have a large impact on the fund performance.
In other words it's not like California bonds are "safer" than Maryland or Michigan bonds, or other states in general, so there's not much difference in the yields by state overall.
Answered by D Stanley on February 2, 2021
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