ETF Trends
ETF Trends

It’s an event like Halley’s Comet, although with a little more frequency: municipal bond yields are higher than those of treasury bonds. For that reason, it makes more sense than ever to grab exchange traded funds (ETFs) that hold them.

"It’s something that doesn’t happen very often," says Glenn Smith, associate of ETF sales at Van Eck. "Maybe once every 7-10 years or so."

Municipal and treasury bonds are considered among the safest investments around. Unlike with corporate bonds, municipalities and the government can draw money from plenty of other sources when they get in a bind – raising taxes, for example. This ability to generate money on a whim makes it significantly less likely that the bond issuer is going to default.

Traditionally, treasury bonds yield more than munis. But take, for example, the 10-year treasury bond vs. the 10-year muni: the treasury offers a 3.48% yield, while the muni offers a 4.04% yield.

Factor in the fact that municipal bonds are tax-free, and it’s a big difference. Calculate your own equivalent tax yield here. In California, the tax equivalent on that muni bond is 6.65%.

Smith says the credit crisis can be blamed as the reason for the shift. Bonds are all about credit ratings, and often to secure better ratings, bond issuers will pay handsomely to have the bonds insured. The higher the rating, the lower the interest the issuer will have to pay out.

Another reason for the shift, says James Colby, municipal bond strategist at Van Eck, is that there was a "flight to quality" by investors when the crisis hit, pushing down treasury yields. Meanwhile, the Federal Reserve has been forcing the rates lower while muni bond yields have remained fairly steady.

In the past, other factors that have caused the yields of munis and treasury to switch places are geopolitical crises, or the rare instance in which a municipal bond defaults. "When it does happen," Smith says, "it can throw markets out of whack, because people get jittery."

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