In the current financial environment, the often misunderstood municipal bond market is not considered to be a “core” asset class by many market participants, nor is it labeled as such by institutions that offer financial products. It can be argued that investment-grade municipal bonds have some qualifications to be “core.”
In this paper, we have examined some of the reasons U.S. investment-grade municipal bonds should be considered a “core” asset class.
Large and Diverse Market
According to the Federal Reserve, the municipal bond market had over USD 3.88 trillion outstanding as of December 2016. There are approximately 1.5 million different municipal bonds outstanding, from tens of thousands of different issuers. Issuers of municipal bonds include local municipalities, school districts, improvement and economic districts, counties, and states.
The average rating (from Moody's, S&P Global Ratings, or Fitch) of investment-grade bonds in the S&P National AMT-Free Municipal Bond Index is higher than the average rating of corporate bonds in the S&P 500® Bond Index.