A common theme in today’s bond markets is a “flattening yield curve.” As today’s treasury curve illustrates, compensation for buying longer term treasury bonds is small measured against yields one can find with short term treasury bonds. Ten-year treasuries yield 2.70% while 30 year treasuries yield 3.05%, or 35 bps of additional yield compensation for extending ones final maturity from 10 years to 30 years. It is worth noting, the most commonly discussed theme relating to fixed income for years has been “rising rates” and here we are, at 2.70% for 10 years and 3.05% for 30 years.
Relative to the U.S. treasury market, the municipal yield curve is steep and has been for many years now. Investors who have been willing to consider longer term bonds have been rewarded with more yield, more income, and strong liquidity for their bonds. While longer maturity bonds can be justifiably intimidating, accounting for the tax exempt status of municipal bonds, and determining a bonds taxable equivalent yield as it pertains to you should help. We find that “digging in” to the data can help ease concerns and remove misconceptions.
Many municipal investors face one of our top federal income tax brackets of 32%, 35%, or 37%. Add 3.80% for Medicare surcharge, and a rough national average of 5% for state income taxes, and many of us find ourselves paying 43.8% of our marginal income in taxes (35% fed + 3.80% surcharge + 5% state). A – AA rated muni bonds with one year maturities yield 1.84%, or a taxable equivalent yield of roughly 3.27% for those facing a higher tax burden, 5 year munis yield 2.08%, or a 3.70% TEY, while long term munis yield 3.70% which is a 6.58% tax equivalent yield. Does investing in high grade A-AA municipal bonds at 6.58% taxable equivalent yields make sense in your portfolio? When you add our ability to identify bonds with less sensitivity to rising rates, we think it likely does.
Call us today to discuss where we see the best combinations of safety and yield in today’s municipal marketplace.