Wednesday, January 23, 2013

Tax-Free Bonds Offer Tempting Yields

As Washington struggled to sidestep the fiscal cliff last year, municipal funds sank. During December, the average intermediate tax-free fund lost 1.2%, according to Morningstar. Investors worried that Congress would undo some of the advantages of municipals. But since tax legislation passed on Jan. 1, the funds have gained back much lost ground.

The markets cheered the legislation because it did nothing to change the tax-exempt status of municipals. In addition, Congress raised the top tax bracket from 35.0% to 39.6%. That may be painful for high income earners, but it makes the tax exemption of municipal bonds more valuable.

To appreciate the impact of the tax rise, consider that the average intermediate-term municipal fund delivers a tax-free yield of 2.5%. In 2012, that yield was the equivalent of a taxable bond with a yield of 3.8% for investors in the top tax bracket. With top rates higher this year, the equivalent taxable yield has jumped to 4.1% -- a fat payout at a time when money-market funds yield almost nothing. "Demand for municipals has been strong because the yields are compelling," says Peter Hayes, who heads BlackRock's municipal group.


Source:  Stan Luxenberg, TheStreet.com

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.


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