Are municipal bonds better than Treasury bonds?
According to asset manager Northern Trust, munis' credit quality is better than ever before. And that makes them a great buy, potentially over Treasury bonds. For investors, adding a dose of munis continues to be the right play.
The advantage of municipal bonds for investors is the fact that they are tax-exempt, meaning that the returns from such bonds are not subject to taxes. It makes it a highly attractive investment for individuals who are in a high tax bracket.
Municipal bond yields are relatively attractive after considering the impact of taxes. Source: Bloomberg, as of 12/5/2023. Past performance is no guarantee of future results. The 50.8% tax rate assumes a 37% Federal tax, 3.8% ACA tax, and 10% state tax.
As of the end of October 2023, municipal bond yields eclipsed the October 2022 highs. While no one can be sure where rates may go from here, long-term municipal yields are at their highest level in roughly a decade, and short-term municipal rates are at their highest level since the Global Financial Crisis of 2008–09.
Stability is a relative term in the municipal bond market. Municipal bonds tend to be safer than many other types of investments, but they are less safe than U.S. Treasury bonds.
Municipal bonds don't hold up against inflation as well as stocks do. When inflation rises, a muni's fixed payment is less attractive. Still a chance of default. While default risk is very low, municipal bonds could still go into default.
If you sit in the 35% income tax bracket and live in a state with relatively high income tax rates, then investing in municipal bonds (munis, for short) will likely be a better option than taxable bonds. Alternatively, if your income is in the 12% tax bracket, then you may want to steer clear of municipal bonds.
higher-income individuals will benefit the most from the tax-free nature of municipal bonds. Furthermore, those living in the locality where the bond is issued can enjoy triple-exemptions from federal, state, and local income taxes.
Investors favor municipal bonds, or "munis," for two main reasons. They are exempt from federal taxes, and they are relatively low-risk investments. While stable, income-producing bonds warrant a position in any well-diversified portfolio, there are inherent drawbacks to owning munis.
The main ways to lose money on bonds include price decreases due to interest rate increases, default or bankruptcy of the bond issuer, call risk, reinvestment risk, and inflation risk. Each of these factors can potentially lead to a decrease in the value of your bond investment or a loss of your initial investment.
Are municipal bonds a good investment in 2023 2024?
Nuveen, a TIAA company, maintains yields for municipals remain attractive despite a strong rally in November 2023. The company believes demand for municipal bonds could increase in 2024 as investors gain conviction that the Fed has ended its rate hikes. Nuveen expects the Fed to cut rates by 150 basis points in 2024.
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
The tax benefits associated with municipal bonds (such as interest income being exempt from federal taxes) always attract investors to the sector. In 2024, Van Eck expects municipal bonds will offer a solid opportunity for total return correlating with our anticipated decline in yields for the year 2024.
Compared with Treasury notes and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.
Financial analysts and the financial media often refer to U.S. Treasury bonds (T-bonds) as risk-free investments. And it's true. The United States government has never defaulted on a debt or missed a payment on a debt.
Retirees are often advised to shirt over to safer investments, like bonds. Municipal bonds offer the benefit of interest that's exempt from federal taxes. In some cases, state and local taxes won't apply, either.
Although municipal bonds may not be totally tax-free, we generally don't suggest investors hold them in tax-advantaged accounts, like IRAs, because the interest income they pay is generally exempt from federal income taxes.
The price and yield (the income return on an investment) of a bond generally have an inverse relationship. In other words, as the price of a bond goes down, the yield goes up and vice versa. Thus, when interest rates rise, a bond's price usually declines because an investor can earn a higher yield with another bond.
Bonds are generally considered a less-risky complement to the volatility of stocks in an investment portfolio. U.S. Treasurys, and specifically Treasury bills and Treasury notes, are the benchmark for a nearly risk-free investment if held to maturity.
For investors who can benefit from tax-exempt income, a fixed-income-only portfolio should contain a substantial allocation to municipal bonds. We favor 25% or more. In the historical study described below, a 25% allocation to municipals increased annualized tax-equivalent return by 0.5% without increasing volatility.
Do municipal bonds pay monthly income?
Most of these types of bonds tend to pay distributions to bondholders every six months, making them a useful tool for investors looking to build a portfolio of investments that pay monthly income. Much like other types of bonds, there are a handful of different types of municipal bonds.
- VanEck Short High Yield Muni ETF.
- VanEck High Yield Muni ETF.
- SPDR® Nuveen Blmbg Hi Yld Muncpl Bd ETF.
- VanEck CEF Municipal Income ETF.
- Franklin Dynamic Municipal Bond ETF.
- Invesco Municipal Strategic Income ETF.
- First Trust Municipal High Income ETF.
Use the Education Exclusion. With that in mind, you have one option for avoiding taxes on savings bonds: the education exclusion. You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs.
According to the NAIC's Capital Markets Bureau, in 2022, property and casualty (P/C) companies accounted for the largest municipal bond investments at $263 billion, followed by life companies at $218 billion.
| Name | Yield | 1 Day |
|---|---|---|
| BVMB2Y:IND Muni Bonds 2 Year Yield | 2.83% | 0 |
| BVMB5Y:IND Muni Bonds 5 Year Yield | 2.48% | 0 |
| BVMB10Y:IND Muni Bonds 10 Year Yield | 2.55% | 0 |
| BVMB30Y:IND Muni Bonds 30 Year Yield | 3.71% | 0.00 |
