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Municipal, or “muni,” bonds are issued by states or local governments to finance public works and infrastructure projects. What makes munis a unique fixed-income instrument is that they’re generally exempt from federal taxes and often exempt from state and local taxes, although investors may be subject to the federal Alternative Minimum Tax.

This potential advantage is more pronounced in higher tax brackets, which is why muni bonds have earned a reputation as an investment geared toward wealthier individuals.

But as we see it, muni bonds aren’t just an investment option for investors in the highest tax brackets. Here are five reasons investors may want to consider investing in muni bonds:

1. Muni bonds tend to be high-quality investments. The five-year cumulative default rate for muni bonds was only 0.08% from 1970-2022.1 Global corporate bonds defaulted at 6.9% over the same time frame.1 What’s more, many municipalities were bolstered by direct federal aid during the pandemic. 

2. Munis currently have a favorable supply/demand balance. In 2023, local and state governments issued fewer new muni bonds because the Federal Reserve was raising interest rates to fight inflation. New issuance is expected to stay somewhat depressed in 2024 for the same reason. This could be a boon for the asset class: Investors will still want ways to help reduce their taxes, but the muni supply may be tight.

3. Muni bonds can help diversify your portfolio. Muni bonds are domestically focused, while many stocks have global exposure and are more sensitive to macroeconomic developments.

4. Muni bonds may be well positioned to withstand a recession. Many municipalities exited the pandemic with strong balance sheets thanks to billions of dollars in federal aid. In addition, it’s common for muni bonds to back essential services, such as sewer, water, and garbage collection. If recession strikes and money is tight, consumers may give up discretionary services, but not basic necessities.

5. Muni bonds could help investors keep more of their returns on an absolute basis. As of March 31, muni bonds were yielding 3.49%. But their taxable-equivalent yield (the return required on a taxable bond to make it equal to the return of a tax-exempt bond) would increase to 3.88% for investors in the lowest tax bracket and 5.90% for investors in the highest tax bracket.  

FIGURE 1

Taxable-Equivalent Yields Can Benefit Investors in Every Tax Bracket 

As of 3/31/24. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Yield to worst (the minimum yield that can be received on a bond assuming the issuer doesn’t default on any of its payments) shown for the Bloomberg Municipal Bond Index, an unmanaged index of municipal bonds with maturities greater than two years. Top tax bracket includes the 3.8% net investment income tax in addition to the 37% bracket (the additional 3.8% applies to individuals who have net investment income and high adjusted gross income). Data sources: Bloomberg and Hartford Funds, 4/24. 

The More You Know

In short, there are many reasons to consider including muni bonds as a core holding in your fixed-income portfolio, regardless of your tax bracket. Ask your financial professional if muni bonds are right for you.

 

Talk to your financial professional to see if tax-free muni bonds are a good fit for your portfolio.

Hartford Funds Tax-Advantaged Bond Funds*

Morningstar ratings for ETFS and Mutual Fund I-Shares

OVERALL
(as of 9/30/2024)
Overall, 4 stars, 3-Year, 3 stars, 5-Year, 3 stars, and 10-Year, 4 stars, rated against 262, 262, 240 and 176 products, respectively. Morningstar RatingTM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

262 Products | Muni National Interm Category
Based on Risk-Adjusted Returns
OVERALL
(as of 9/30/2024)
Overall, 4 stars, 3-Year, 4 stars, and 5-Year, 4 stars, rated against 262, 262 and 240 products, respectively. Morningstar RatingTM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

262 Products | Muni National Interm Category
Based on Risk-Adjusted Returns
OVERALL
(as of 9/30/2024)
Overall, 5 stars, 3-Year, 5 stars, 5-Year, 5 stars, and 10-Year, 5 stars, rated against 414, 414, 373 and 268 products, respectively. Morningstar RatingTM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

414 Products | Intermediate Core Bond Category
Based on Risk-Adjusted Returns
OVERALL
(as of 9/30/2024)
Overall, 5 stars, 3-Year, 5 stars, and 5-Year, 5 stars, rated against 414, 414 and 373 products, respectively. Morningstar RatingTM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

414 Products | Intermediate Core Bond Category
Based on Risk-Adjusted Returns

* View the full list of Hartford Funds. ETFs are not mutual funds. Unlike traditional open-ended mutual funds, ETF shares are bought and sold in the secondary market through a stockbroker. ETFs trade on major stock exchanges and their prices will fluctuate throughout the day. Both ETFs and mutual funds are subject to risk and volatility.

Moody’s Investors Service: “US Municipal Bond Defaults and Recoveries, 1970-2022,” most recent data available.

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. Diversification does not ensure a profit or protect against a loss in a declining market.

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