| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Stay in the money with munis
How to invest in municipal bonds after their powerful rally |
MarketWatch - Nov 3, 2009 - By Jonathan Burton
SAN FRANCISCO (MarketWatch) -- Municipal bonds are no longer cheap keys to the cities but they can still show investors around town.
After double-digit losses in 2008, prices of these tax-exempt investments have climbed along with other bond sectors this year. Muni-bond mutual funds rose 14.4% on average through Oct. 29, according to fund tracker Lipper Inc. Meanwhile, muni yields, which move opposite to price, haven't seen such low levels in more than four decades.
Such a strong surge isn't typical for bonds, and it makes some muni-market analysts uneasy. "A little profit taking after this kind of rally makes some sense," said Philip Fischer, municipal strategist at BofA Merrill Lynch Global Research.
"The super-sale is over," added Warren Pierson, co-manager of Baird Intermediate Municipal Bond Fund (BMBSX 11.48, 0.00, 0.00%) . "More of the sectors of the bond market are now at fair market value, but there's a place for municipals."
Some investors might wonder where that place might be. States and other municipal-bond issuers face Draconian budget challenges even as the U.S. economy overall appears to be improving. Tax revenue from businesses, homeowners and workers is down sharply. As a result, services and programs are on the chopping block.
"States tend to lag the economy," said Sheila Amoroso, co-director of the municipal bond department at mutual-fund giant Franklin Resources Inc. "2010 is going to be a tough year for states; 2011 probably will be too. Be prepared for potential downgrade risk and headline risk."
Tax haven
Still, municipal bonds hold appeal on several fronts.
Top of the list: taxes. The Bush administration's tax cuts are due to expire at the end of 2010. Though it's an election year, if the economy is healthy there's a good chance Congress will let the cuts expire for top earners, at least.
In that case, the highest marginal federal income tax rate after 2010 could be expected to revert to the pre-rollback level of 39.6% from 35%. If the repeal goes further, those in most of the lower brackets could expect to pay about three percentage points more in taxes.
"Taxes are undoubtedly going to go up," said Fischer, the BofA Merrill strategist. "Congress is going to face a deficit of around $1.4 trillion. The [Obama] administration has made it clear they want to do some large amounts of income distribution. I would strongly recommend that people believe them."
Cue municipal bonds. Tax-free income, of course, is the main reason people buy them. Munis are exempt from federal tax and also state tax in the state of issuance. Treasurys are free only from state and local taxes. The higher the U.S. and state tax rates, the more valuable the tax-free income of muni bonds and muni-bond funds.
At current yields, muni bonds have a clear advantage over Treasury bonds for more than just the wealthiest taxpayers, said George Strickland, manager of Thornburg Limited Term Municipal Fund (LTMIX 13.81, 0.00, 0.00%) .
Munis' "tax-adjusted yields are great," he said. Investors in the 31% and 28% marginal tax bracket, as well as the 35% bracket, will generally do better in a muni bond than buying a comparable Treasury and paying the tax.
To calculate a muni's taxable equivalent payout, divide the bond's yield by 1 minus your marginal tax rate and compare that to a similar Treasury. For instance, for a taxpayer in the 28% bracket, a 10-year triple-A rated muni with a 3% annualized yield equates to a Treasury yield of 4.2% -- 3% divided by 0.72 (or 1 minus 0.28). The 10-year Treasury recently yielded 3.4%.
Another factor in munis' favor is basic supply and demand.
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