Municipal bond funds - is the risk worth the little reward?

[progree]

https://www.marketwatch.com/story/making-sense-of-the-turmoil-in-the-muni-market-2020-05-22?siteid=yhoof2&yptr=yahoo

Opinion: Making sense of the turmoil in the muni market, Mark Hulbert, 5/22/20

Is it safe for retirees to tiptoe back into the muni bond market?

I ask because that normally staid and sleepy market endured nothing short of an earthquake in March. In the space of just nine trading sessions, for example, the iShares National Muni Bond MUB plunged 13.7%, in one fell swoop wiping out years of any benefit that munis otherwise have over other bonds. High-yield munis performed far worse: The Van-Eck Vectors High Yield Municipal Index ETF HYD, +0.24% fell 36% from late February through mid-March.

The muni market in April quieted down somewhat from that extraordinary burst of volatility, and muni bonds have recovered some (though not all) of their mid-March losses. With the dust mostly settled, gutsy retirees and soon-to-be retirees are wondering if they should either return to the muni arena or even increase their pre-existing exposure.

One initial sign that it might be safe to return is that the premium/discount to NAV at which muni ETFs are trading have returned to low levels. As you can see from the accompanying chart, the MUB traded at an extraordinary 5.8% discount to its NAV on Mar. 18, after having continuously traded over prior months at a tiny discount or premium. This revealed a huge amount of turmoil in the muni market. Since then, as you can see, the MUB has return to trading at close to pre-March norms.

For starters, let’s compare muni bonds to Treasurys etc. and etc. and etc.

He goes on to compare the risks and yields of Treasuries, corporate bonds, and munis.

Also about Mitch McConnell in late April scaring the muni market by saying that states and cities should declare bankruptcy rather than rely on a federal government bailout. And state and local budgets are being hammered by reduced tax revenue and higher spending. But very unlikely that federal government will do nothing and just let a bunch of municipal bankruptcies happen.

Nevertheless, I'm worried a lot about my position in a municipal bond fund (Fidelity's Minnesota Municipal Income Fund, FIMIX). For such a small yield advantage over Treasuries (compared to the risk), I'm doing a lot of worrying.... just for a fucking extra percentage point in after-tax yield? (Treasuries are exempt from state and local taxes, but are federally taxed. Out-of-state municipals are generally free of federal taxes but are taxed by your state. In-state municipals are generally free of both federal and state taxes).

Oh, I don't worry about it plunging into oblivion. But just a few percent drop caused by a few defaults and bankruptcies wipes out several years of any marginal yield advantage over safer alternatives -- such as Treasuries, and FDIC- or NCUA-insured CDs.

I know some point to the federal deficits / debt and says Treasuries are not super-safe either, but everything I've read is if comes to where defaulting is considered, they will always (despite things Trump said a few years ago) print the necessary money (the modern way, just making some electronic entries), rather than letting the U.S. government default.

I have corporate bond funds too, but that's a whole 'nuther post.