Local Finances Are Troubled, but Fund Investors May Still Profit

Local Finances Are Troubled, but Fund Investors May Still Profit

High-grade municipal bond portfolios have been among the best places to find income.

O'Hare International Airport in Chicago. While fewer people are flying these days, revenue bonds for airports aren't dependent on direct government tax collections.Credit...Kamil Krzaczynski/Agence France-Presse “” Getty ImagesJuly 10, 2020, 5:00 a.m. ET

Record unemployment and the coronavirus recession are wreaking havoc with the cash-flow prospects for many municipal bond issuers.

State and local governments that rely on income tax and sales tax face sharply lower revenues. And empty roads, airports, stadiums and convention centers mean there is less (or no) revenue to help pay back the bonds that financed those projects.

Yet many municipal bond mutual funds and exchange-traded funds have managed to post positive returns for the first half of the year. After falling 11 percent in the worst of the coronavirus sell-off in March, the market rallied when the Federal Reserve stepped in with support. At this point, the average high-grade intermediate municipal bond fund is back above water for 2020.

The Vanguard Intermediate-Term Tax-Exempt mutual fund gained 2.2 percent for the first half of the year. American Funds' Tax-Exempt Bond Fund of America rose 1.3 percent this year to date. The iShares National Muni Bond E.T.F. gained 2.3%.

Karl