Asset Class Update: Municipal Bonds

Municipal bonds have rallied 4.8% so far this year, after one of the group’s worst calendar-year performances ever in 2008 (-2.5%). Muni bond yields are still above historical averages, however, suggesting that many investors remain concerned about unresolved technical factors and the potential stress that a slowing economy might have on municipal revenues. The key question facing investors in the near term is whether the superior yields of high-quality muni bonds relative to those of risk-free U.S. Treasuries are adequate compensation for owning them in an economic climate that could make it more challenging for some muni issuers to meet their debt obligations. Click here to read Fidelity's thoughts on the municipal bond market.