Municipal Bonds Outpacing Stocks And May Offer Attractive Tax-Equivalent Yields
From: Sierra Mutual Funds & Ocean Park Asset Management, Inc.
Municipal bonds (“munis”) have a lot of attractive qualities. First and foremost, unlike Treasuries or corporate bonds, the interest paid on municipal bonds is free from federal and, in some cases, state and local income taxes. That may make munis especially appealing to investors in higher personal income tax brackets. Check out the chart below. An investor in the top tax bracket made the equivalent of 11.63% owning high yield municipals (far right column), much more than in high yield corporate bonds or other bond options.
Also, munis — high yield and investment grade — have historically been an asset class with limited risk of default, much lower than the average default rates of corporate bonds. Add to this the fact that municipal bonds have historically had lower volatility and, recently, better performance than stocks: the U.S. stock market was up about 1% year-to-date, with a lot of volatility, while high yield municipal bonds gained a steady 4.9%.
Source: Nuveen Investments, Barclays Capital as of 3/31/2016
1. The taxable-equivalent yield is based on the highest individual marginal federal tax rate of 39.6%, plus the 3.8% medicare tax on investment income (the Net Investment Income Tax). Individual tax rates may vary.
2. Some income may be subject to state and local taxes and the federal alternative minimum tax.
Yields are yield-to-worst as of March 31, 2016. Yield-to-worst is the lowest potential yield that can be received on a bond without the issuer defaulting.
