Why can a municipal bond fund go down in value?

When interest rates aren't changing, why can a municipal bond fund go down in value? The bonds owned by the fund are earning interest. There are fund expenses but they should be less than the interest earned so why is there a dip in value and how long would it take to recover assuming interest rates don't go up?

I watched Fidelity Massachusetts Municipal Income (FDMMX) go down in value a few percent in the last month and since interest rates are unchanged, I don't understand why.

4 Answers

  • 1 decade ago
    Favorite Answer

    Bonds are bought and sold in a free marketplace. When the economy is robust, investors tend to place their money into investments which will typically yield higher returns than bonds (ie. stocks). Hence there is more bond sellers than buyers in the market. This forces the price of bonds down in order to attract buyers so a bond with the face value of $1000 can be purchased for $980. Bonds are considered a defensive investment which tend to perform better when the economy is sluggish.

  • Anonymous
    1 decade ago

    Interest rates are not the only factor that will make bonds go up or down. There are a lot of factors. Sometimes it is nothing at all wrong with the security in question; it is just market sentiment. This is the type of situation that investors looked for: undervalued assets. They buy assets for less than they are worth and then sit back and wait for them to go up in value. Remember this: in the short term, the market is a voting machine, but in the long run the market is a weighing machine.

  • Anonymous
    1 decade ago

    It may be the market sentiment regarding Massachusetts municipal bonds has declined. Are housing prices falling in Massachusetts? That could be one reason.

  • Anonymous
    1 decade ago

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