Municipal Bonds Vs. Money Market Funds (2024)

FAQs

Is money market better than bonds? ›

Bond funds invest in various fixed-income securities with varying maturities and credit ratings and offer a higher potential return than money market funds but also come with greater risk.

The primary difference between municipal bonds, also known as "munis," and money market funds is that municipal bonds are single bond issues from local or state governments, while money market funds are a type of mutual fund that invests in short-term, low-risk debt.

Bonds carry more risk than money market funds. A bond's lender may not be able to make interest or principal payments on time, or the bond may be paid off early with the remaining interest payments lost.

Tax-free interest – The largest benefit of investing in municipal bonds over corporate bonds is the tax-free interest they provide. Although the stated interest rates paid by corporate bonds are typically higher, interest payments are reduced by federal (and, potentially, state) taxes.

The national average rate for savings accounts will be 0.29 percent by the end of 2023, McBride forecasts, while predicting an average of 0.34 percent for money market accounts.

Although money market accounts are a relatively safe investment, there is always the potential for loss. If you lose your money in a money market account, don't panic! You can take steps to protect yourself and ensure you get your money back.

The only real disadvantage of municipal bonds is that they carry relatively low interest rates compared to other types of securities. This is particularly true when the economy is strong and interest rates for Treasury bills and CDs rise.

Safety: Municipal bonds are considered a relatively safe fixed-income investment. GO bonds are usually considered safer than revenue bonds, as a municipality can raise taxes to cover outstanding debt obligations, whereas revenue bonds are subject to the earnings made by that particular project.

Most of our experts agree that one of the safest places to keep your money is in a savings account insured by the Federal Deposit Insurance Corporation (FDIC). “High-yield savings accounts are an excellent option for those looking to keep their retirement savings safe.

What is the safest investment with the highest return? ›

Online savings accounts are among the safest savings vehicles, with federal insurance covering up to $250,000 in deposits per holder, whether through a bank or a credit union. (A joint account with two holders is insured for up to $500,000.)

Municipal bonds had a tough 2022. But 2023 is looking much better and that makes us optimistic about the potential benefits of considering this asset class for client portfolios. Inflation has begun to moderate, and yields declined sharply in January, which supported the municipal bond market to start the year.

After a long and difficult 2022 year to date, the municipal bond market should fare better in 2023. We think that rates will be volatile due to Fed policy and concerns about economic growth. However, for the first time in a long time, investors can finally earn attractive yields without having to take on undue risk.

In other words, as the price of a bond goes down, the yield goes up and vice versa. Thus, when interest rates rise, a bond's price usually declines because an investor can earn a higher yield with another bond. Conversely, when interest rates fall, the bond's price usually rises.

Do no withdraw cash. Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.

Bankrate Chief Financial Analyst Greg McBride, CFA, says to expect top-yielding savings and money market rates to hit 5.5% annual percentage yield (APY) in the middle of 2023, reaching 2007 levels. He also expects those yields to end the year at around 5.25% APY. Both top yields are for nationally available accounts.

Prime money market funds.

U.S. government money market funds are typically regarded as the safest of the three, and within that category, those with a high concentration of Treasuries—with full government backing—would be exposed to a lower likelihood of default risk.

Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events. Beyond that, the money is essentially sitting and losing its value.

What is the biggest disadvantage of money market? ›

One of the biggest disadvantages of a money market account is that some financial institutions may put a cap on how many convenient withdrawals you can make each month. The Federal Reserve once limited consumers to six per month, though this rule was phased out in 2020.

Municipal Bonds in an IRA

Since the interest and capital gains in an IRA are already tax-exempt, there isn't any benefit to holding munis in an IRA.

General obligation (GO) bonds are funded directly by tax revenues. They are the safest type of municipal bond, but they often have the lowest interest rates.

If you own municipal bonds, you're likely well aware that they've had a tough year, as the Federal Reserve has hiked interest rates sharply. Rising interest rates negatively impact the price of bonds, including muni bonds; this prompts many investors to sell, which puts further pressure on bond prices.

Unlike the Treasury market, long-term munis yield more than ones at the short end, thanks to a relatively steep yield curve. Munis ranked AAA yield around 3.5% for bonds maturing in 25 to 30 years, according to Tradeweb. That compares to 2.8% for a one-year muni and 2.3% for a 10-year bond.

Who buys municipal bonds? About 72 percent of bonds are owned by individuals directly or through mutual funds and the like. About 25 percent of bonds are owned by businesses, primarily property and casualty and life insurance companies, but also banks.

Can You Lose Money on Municipal Bonds? You also could lose money on muni bonds if you are forced to sell the bonds on the secondary market at the wrong time. The price you get will be determined by the total dollar amount of the remaining interest payments due, factoring in the prevailing rates available on new issues.

If you sit in the 35% income tax bracket and live in a state with relatively high income tax rates, investing in municipal bonds (munis, for short) will likely be a better option than taxable bonds. Alternatively, if your income is in the 12% tax bracket, you may want to steer clear of municipal bonds.

Some of the disadvantages of bonds include interest rate fluctuations, market volatility, lower returns, and change in the issuer's financial stability. The price of bonds is inversely proportional to the interest rate. If bond prices increase, interest rates decrease and vice-versa.

Where is the safest place to put $100,000? ›

Some good investments for retirement are defined contribution plans, such as 401(k)s and 403(b)s, traditional IRAs and Roth IRAs, cash-value life insurance plans, and guaranteed income annuities.

At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).

Among the best choices for retirement income are balanced funds that own portfolios of stocks and fixed income, with a strong focus on dividends and interest income. But retirees also opt for fixed income funds that invest exclusively on bonds.

Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.

High-quality bonds and fixed-indexed annuities are often considered the safest investments with the highest returns. However, there are many different types of bond funds and annuities, each with risks and rewards. For example, government bonds are generally more stable than corporate bonds based on past performance.

One of the biggest disadvantages of a money market account is that some financial institutions may put a cap on how many convenient withdrawals you can make each month. The Federal Reserve once limited consumers to six per month, though this rule was phased out in 2020.

Why is a money market account better? ›

Easy access: Money market accounts can offer you immediate access to your funds, almost whenever you may need it. MMAs often offer the ability to write checks or access cash via debit card. And know you can typically withdraw without paying a fee as you might with a certificate of deposit (CD).

Low risk: Money funds are generally less risky than stock and bond funds, given that federal regulations require that they invest short-term, high-quality investments. The NAV of a money market fund is designed to remain stable, unlike stock and bond funds, which can experience high volatility.

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

Banks may provide money market savings accounts, which are different than money market mutual funds. Past performance does not guarantee future results. All investments are subject to market risk, including possible loss of principal.

A money market account is a type of savings account that provides liquidity and earns interest on the principal. You cannot lose the balance of a money market account, although penalty fees may be charged for not meeting balance and withdrawal requirements.

Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.

Ramsey recommends putting your money not into a savings account, but instead into a money market account. "Most money market accounts will give you a debit card and checks to use -- that way, you can get to your money when you really need to (keeping it 'liquid')," the Ramsey Solutions blog states.

If you want to earn a higher APY and you can meet a higher account minimum, a money market account is a good choice. It's also a smart option if you need easy access to your money. If you know that you won't need the money for a while and want to earn an even higher APY, a CD works well.

Average money market rates fall between 0.01% APY and 3.45% APY, again depending on your balance. Below, we've listed a number of popular banks and given a range of their basic money market account rates. Again, your rate will depend on your account balance.

CD rates are typically higher than money market account rates. Banks have an incentive to give you better rates for CDs because you promise to give up access to your money until the end of the CD term. What's the difference between a CD and a mutual fund?

What is the bond fund performance in 2023? ›

The Bloomberg Global Aggregate bond index rose 3.7% in 2023 through Thursday after a 16% decline last year. The S&P U.S. Aggregate Bond Index fell 12% in 2022 and is up 3.1% since.

They attempt to keep their net asset value (NAV) at a constant $1.00 per share—only the yield goes up and down. But a money market's per share NAV may fall below $1.00 if the investments perform poorly. While investor losses in money market funds have been rare, they are possible.

Money market funds are traditionally super safe investments and pay out a higher return than what you might get from a regular bank account.

Are money market accounts safe? Yes, money market accounts are safe. The FDIC insured these products for up to $250,000 per depositor, per account ownership category. At credit unions, money market accounts receive the same level of protection from the NCUA.