In light of today’s muni market yields, it’s common for investors to wonder where they can find value in the municipal bond market.

Where, they ask, can they reinvest proceeds from their redemptions at attractive yields.

A soaring muni market

As the headlines have blared, the muni market is on fire. In the past two weeks, investors have plowed $3.5 billion of new cash into municipal bond mutual funds, making it an extraordinary 60 consecutive weeks of inflows.

Demand has always been strong, but a combination of factors has attracted even more investors.

Many sought additional tax-free income after the tax overhaul in late 2017, which capped state and local tax deductions at $10,000. More recently, concerns over the ongoing trade war, volatile equity markets and economic disruption from the spread of the coronavirus have investors flocking to safe havens.

While investors have seen the market value of their municipal bonds appreciate dramatically, yields – which move inversely to prices – are scraping levels not seen in decades.

In this environment, it’s common to hear from those wondering where they can deploy their cash or reinvest when their bonds are redeemed (“Reinvesting Muni Bond Redemptions”).

Take out the guesswork

Having worked in and studied the municipal bond market for decades, we know that no investment can be analyzed in a vacuum. So when muni market yields are perceived as too low, investors should compare these yields with other fixed-income alternatives.

Today, 30-year insured municipal bonds are yielding about 2.50%, which in higher-tax states can have a taxable equivalent of almost double that rate. Thirty-year Treasury bonds, on the other hand, are yielding about 1.65% – and that income is taxable.

Meanwhile, corporate bonds haven’t rallied along with munis and Treasuries because of safety concerns (“Muni Market Returns Rise Amid ‘Gluttonous’ Demand”).

Pity the poor investors who were talked into laddering their portfolios. Over the past 10 years, when their laddered bonds came due, their dollars were continually reinvested at lower and lower rates.

Of course, there are still those who advocate parking cash in money-market funds and waiting for yields to rise. A troubling scenario if you picture, for a moment, the amount of tax-free income these would-be clairvoyants have sacrificed as yields have declined over the years. This is income they’ll never recapture.

In our discussions with investors, we advocate a realistic, time-tested stance.

Eliminate guesswork and rely on the known. It’s impossible to consistently and accurately predict the direction and timing of interest rates, so don’t try.

Embrace prevailing muni rates, not those you may or may not see in the future, and understand their tax-equivalent yields.

Look for bonds – based on quality first, then yield – that make sense for your particular investment objectives and risk tolerance. Many investors do it themselves, though they often work with experienced professionals who focus on munis and understand the nuances of bonds.

Think about it. Investors are flocking to munis because they’re finding what they need. The key is applying insight and a clear-eyed focus on what you’re trying to achieve: An uninterrupted stream of tax-free income and a good night’s sleep.

James A. Klotz is the President of FMSbonds, Inc. Email the Author03/03/2020