Have you heard the latest chatter among commentators who, after arguing for years that interest rates were about to spike, now talk about a low-interest-rate environment and how income investors are scrambling to find higher yields?
Well, just as they missed the mark on interest rates, they’re also apparently oblivious to the key point for investors: After-tax yield.
Experienced municipal bond investors know this and are now realizing more value from their munis without wasting time trying to guess the future direction of interest rates.
How are they doing it? Uncle Sam.
Real value
The tax increases that went into effect last year have turbo-charged the after-tax value of munis. As we point out on the tax map, the new tax rules sock it to high earners.
In some states, the combination of federal and state taxes exceeds 50%.
Consider, for example, a long-term muni yielding 4.50%. To equal that after-tax yield, investors in California would need a 9.15% taxable bond, New Yorkers would need an 8.78% bond and Texans and Floridians would require taxable bonds yielding 7.95%.
But alas, no quality taxable bonds even approach these yield levels.
The big picture
Meantime, as some continue to ponder the direction of yields, bond issuance has slowed.
Cities and states have curbed their borrowing after low interest rates last year spurred a spate of refinancings.
Political leaders, still smarting from the fiscal calamities of 2007-2009 and with an eye toward the upcoming elections, don’t appear eager to take on more debt.
And yields have ticked down since the beginning of the year and are threatening to go even lower, hemmed in by the limited supply of munis and a strong investor appetite for safety.
If you’re interested in generating a steady, more-valuable stream of income, there’s no time like the present. While we can’t predict the direction of interest rates, we’re certain you can’t benefit from waiting and watching.
Because of their tax exemption, munis today offer investors the most sought-after prize of all: eye-popping after-tax yields. No other financial instrument offers a comparable level of security and return.
