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Municipal Bond Funds Hold Up

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July 9, 2002 — High-quality municipal bond funds are looking attractive these days.

As the average U.S. stock fund registered more losses so far this year, with seemingly no end in sight, the returns from tax-free bonds are pretty darn good.

High-quality tax-free bond funds posted an average gain of 4% for the first half, while the average domestic equity fund fell 12.1%. The average high-quality bond fund returned just 2% for the same period.

Given rising unemployment, corporate accounting scandals, and an unfriendly stock market, relatively risk-free municipal bonds have also become more attractive to investors.

Tax-free funds invest in municipal bonds issued by state and local governments. The market is generally perceived to be a higher quality market, versus equivalently rated corporate bonds.

Lyle Fitterer of Strong Intermediate Muni Bond Fund, a top performer this year, antiocipates that the Federal Reserve will remain on hold till the end of the year as far as rates are concerned. He thinks there will continue to be tremendous interest in municipal bonds versus corporate bonds.

“With uncertainty in the stock market, and uncertainty in the corporate bond market, I think cash flows into the industry should stay strong,” he says. “At the same time supply, I think, is going to be very heavy.”

Though Fitterer says we are probably on pace for a record year in terms of issuance, he sees most of it getting absorbed by demand.