Morningstar Says This Overlooked Asset Could Break Out in 2023. Is It Right For You?

In the world of investments, perhaps none are less flashy than municipal bonds. If stocks and corporate bonds are the steak and roasted potatoes of your investment plate, municipal bonds are more like steamed brussels sprouts. But this overlooked asset class may be having its moment. Financial firm Morningstar believes that after a difficult 2022, this year could be an especially good time to work municipal bonds into your portfolio.

For help investing in municipal bonds, consider working with a financial advisor.

Municipal Bonds Basics

Municipal bonds are debt securities purchased from state, county or city governments. Federal government bonds are considered a separate asset class. Government entities offer municipal bonds to pay for projects and generally pay interest payments semi-annually.

The two most common varieties of municipal bonds are general obligation (GO) bonds and revenue bonds. While the former is backed by the credit of the city and state in which the bond is issued, the latter is backed by the revenue that will be generated by the project the bond funds – like a new bridge.

Municipal bonds are exempt from federal taxes, and in many cases, state and local taxes as well. Municipal bonds can come to maturity in a few years or in as long as a decade. They can be purchased with an online brokerage account, in a mutual fund or exchange-traded fund, or with the help of a financial advisor.

Municipal Bonds in 2023

While municipal bonds are often part of a well-balanced portfolio, Morningstar says 2023 is looking especially promising for this overlooked debt security.

Morningstar analyst Katherine Lynch writes that “yields on municipal securities are at their highest levels in many years. The average intermediate muni-bond fund stands at 3%, compared with roughly 1% just a year ago.”

Similarly, Lynch notes that both state and local governments have generally strengthened their fiscal positions in recent years, meaning that the quality of the credit is very strong. This means that even if there is a deepening recession over the next few years, municipal bonds should be in a good position relative to corporate bonds.

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How Municipal Bonds Fit Into Your Profile

Just because municipal bonds are currently strong doesn’t mean you should be liquidating all of your assets and rushing to buy them up. Instead, look at how much of your portfolio is currently devoted to fixed-income securities and consider shifting some of your money into municipal bonds.

If you need help figuring out just how much of your portfolio should be in fixed-income securities, use SmartAsset’s free asset allocation calculator.

Bottom Line

After having a rough year last year, 2023 is looking to be a strong year for municipal bonds. As Morningstar notes, local and state governments are in a strong position financially and yields appear strong, so these government debts figure to be a good option for those looking for a fixed-income investment option.

Investing Tips

• A financial advisor can help you make the right decisions with municipal bonds. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• If you want to know how much your investment may be worth down the road, use SmartAsset’s free investment calculator.

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