The Growing Tax-Benefit Appeal of Munis

Municipal bonds are once again yielding more than Treasuries.

The yield on the average 10-year municipal bond is just over 100 percent of the yield on a 10-year Treasury, up from less than 90 percent less than a month ago. And that’s during a period in which Treasury yields themselves have risen substantially.

For investors who pay taxes, that makes muni yields quite attractive.

There’s a long list of reasons why muni bond yields have risen (and prices have suffered) in recent months, including fears that the city of Detroit might go bankrupt and that the tax benefits of municipal bonds might be reduced by the federal government.

Investors have to closely scrutinize the credit quality of issuers, since bond insurers now play a much-diminished role after the financial crisis. Larger differences in prices and yields for different levels of credit quality are beginning to appear, so it’s not a good idea to buy a handful of municipal bonds and put them in a drawer. Owning a broader, well-diversified group of municipal bonds, perhaps through a municipal bond fund, is a better bet.

All that said, municipal bankruptcies remain quite rare, and the financial condition of state and local governments continues to improve. There’s also the fact that higher tax rates have increased the tax benefit of owning municipal bonds.

For most tax-paying investors, munis should continue to be a core holding of a well-diversified portfolio.

Source:  Simeon Hyman, CFA, BloombergBlack Chief Investment Officer

D2 Capital Management's Tax Free Income Portfolio consists of a diversified mix of highly rated municipal bond mutual funds.  The Portfolio currently has a 1.96% SEC 30 day yield and a 3.20% trailing 12 month yield which results in a 4.4% tax equivalent yield for an investor in the 28% Federal Income Tax bracket (as of 13 June 2013).

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.

 

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.