The government is reportedly scrutinizing the tax-exempt status on municipal bonds as it heads into the “fiscal cliff.” However, disregarding the favorable tax treatment, muni bonds and exchange traded funds are still attractive investments.
Municipal bonds typically have higher yields, compared to other taxable government bonds, and the credit quality will improve along with a strengthening economy, writes Deborah Levine for MarketWatch. [What’s Behind the Muni Bond ETF Sell-Off?]
“With a reasonably favorable credit environment for municipalities, we still expect muni bonds will be the place to be,” Matt Tucker, head of fixed income strategy at iShares, said in the article.
“The role you expect muni bonds to play in your portfolio should not be for capital appreciation, but to provide income and diversity,” Tucker added.
Currently, the triple-A 10-year munis yield about 1.76%, or about as much as Treasury yields but they are more worthwhile for those in higher tax brackets. According to Bank of America Merrill Lynch, municipal bonds in general have returned 7.2% on average so far in 2012, with an effective yield of 2.6%. In comparison, Treasuries have returned around 2%, with an effective yield under 1%. [Muni ETFs Extend Losing Streak on Tax Jitters, Bond Flood]