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| BondsOnline.com: instant access to and extensive coverage of over 3.5 million stocks, bonds, indexes and other securities covering major and emerging markets and exchanges across the globe. |
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| 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
|
0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| More |
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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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Credit Crunch Provides Opening In Muni Bonds |
By TOM LAURICELLA, Wall Street Journal - December 8, 2007
There is a silver lining for investors resulting from the bond-market tumult: unusually high yields on tax-exempt bonds.
Muni bonds, of course, have an attractive feature: You don't pay state, local or federal taxes on the income. Because of that, the yields are typically lower than on taxable securities, such as U.S. Treasurys.
Yields on tax-exempt bonds have been higher than normal. Keep in mind:
• Yields are almost on a par with some taxable debt.
• Watch out for risk that muni-bond insurers could run into trouble with mortgage-tied debt.
• High credit quality and a history of minimal defaults may be a cushion.
It can be a big gap: Going back to 1990, the yield on the average, top-rated 30-year muni bond has been only 89% of the yield offered on the 30-year Treasury. Munis maturing in 10 years averaged a yield that was 81% of comparable Treasurys.
But right now, investors can essentially get the tax advantage -- at no cost.
This week the average 30-year muni yielded 4.29%, which is just about the same as a U.S. 30-year bond. To get the same after-tax yield, an investor in the top tax bracket in a high-tax state like New York would need to earn 6.6% on a Treasury bond.
That's "really attractive," says financial planner Harold Evensky.
Of course, if there is a lesson hammered home by this year's wild bond markets, it is this: When you see a yield that's unusually high, there's going to be a reason. Two factors are responsible for driving yields on municipal bonds to these unusual heights.
The first is that investors have been selling anything not issued directly by the federal government -- irrespective of the issuer's credit-worthiness. That has included an aversion to debt issued by state and local governments.
Second, the municipal-bond market has been rattled by concerns about the financial health of companies that insure bond issuers against defaulting on their interest payments.
These insurers also guaranteed bonds backed by low-quality mortgages and are under pressure to back up those guarantees or face ratings downgrades.
Though it is considered unlikely, such downgrades would most likely lead to the downgrade of muni debt those companies also insure. That, in turn, would send prices on those bonds lower -- and yields even higher. (Bond yields move in the opposite direction of prices.)
In the short term, the uncertainty about muni-bond insurers creates what Wall Street pros call "headline risk" for investors holding those bonds. But they argue that the underlying credit-worthiness of muni bonds is extremely high. Earlier this year, Moody's Investors Service completed a study of default rates on high-rated muni bonds and found that just 0.1% failed to make good on interest payments -- a far lower rate than on corporate bonds.
If bonds get downgraded because of a problem with the insurers (or because the slowing economy has an impact on the issuer), that bond is going to take a hit in price.
But if you're a long-term investor who intends to hold a security for years, you can ride that out.
And even if a bond goes from carrying a triple-A rating to a double-A rating, "that's still a very high-quality investment," says Daniel Solender, director of municipal-bond management at Lord Abbett & Co.
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Income Security Recommendation January 2013 Issue.
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