Given headlines about the fiscal challenges facing many states, some might think municipal bonds—bonds issued by states, cities, and other municipalities to fund building programs and other activities—would be suffering.
In fact, municipal bond investors have enjoyed good returns to date in 2009. In recent reports to shareholders, T. Rowe Price municipal bond managers discuss some of the factors that have helped reverse losses suffered late last year:
- Attractive after-tax yields and concerns over possible tax increases have helped foster demand.
- The federal government’s Build America Bond program has provided another (taxable) outlet for state debt. As a result, new municipal bond issuance has been lower than expected, and less supply has meant higher muni bond prices.
Still, T. Rowe Price managers warn that the credit environment for the municipal market could remain challenging for some time. In particular, falling tax revenues could lead to modestly rising bond defaults in the coming year—even though these historically have been rare. Of course, municipal bond prices would also be vulnerable should inflation fears or other factors lead to a general rise in interest rates.
Given recent fiscal challenges, our managers have been focusing in part on essential service revenue bonds.
- Unlike general obligation bonds, which are paid back through tax revenues, essential service revenue bonds are usually backed by stable cash flows that are less vulnerable to difficult economic times.
- Examples of such securities might include bonds issued by water and sewer districts and electric utilities.
Careful analysis for individual securities will also be important in coming years. We continue to conduct our own thorough research and assign our independent credit ratings before making investment decisions.
for each 3-, 5-, and 10-year period ended 9/30/09.
*Based on cumulative total return, 13 of 13, 13 of 13, and 12 of 12 T. Rowe Price bond funds (including all share classes and excluding funds used in insurance products) outperformed their 3-, 5-, and 10-year Lipper averages, in a variety of market conditions, as of 9/30/09. Results will vary for other periods. All funds are subject to interest rate risk and credit risk, including possible loss of principal. Fund returns have been affected by market volatility and are negative for certain periods. Yield and share price will vary.
Past performance cannot guarantee future results.
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