Taxable municipal bonds and related exchange traded funds may be a good fixed-income alternative to investment-grade corporate debt.
According to J.P. Morgan analysts, investors should consider taxable munis over comparable corporate bonds to generate income without sacrificing credit quality, reports Randall Forsyth for Barron’s.
AA-rated long-term non-callable taxable munis have a 4.1% yield, showing a spread of 49 basis points above corresponding corporate bonds and 168 basis points over comparable Treasuries.
Investors can look at Build America Bond ETFs for diversified exposure to taxable munis. Build America debt obligations were first created under President Barack Obama’s 2009 American Recovery and Reinvestment Act where municipalities sold $188 billion of the debt before the program expired at the end of 2010. The Build American Bonds helped diminish borrowing costs for state and local governments as part of a stimulus package. Local governments used the bonds to pay for infrastructure projects and received a 35% federal subsidy on interest payments.
For example, the PowerShares Build America Bond Portfolio (NYSEArca: BAB) has a 9.13 year duration and a 3.54% 30-day SEC yield, and SPDR Nuveen Barclays Build America Bond ETF (NYSEArca: BABS) has a 12.79 year duration and a 3.42% 30-day SEC yield. [Build America Bond ETFs Lead in Munis Market]
BAB’s credit quality breakdown includes AAA 10%, AA 41%, A 38% and BBB 1%. BABS’s quality allocations include Ass 11.1%, Aa 44.4%, A 44.1% and Baa 0.5%.
In contrast, the iShares 10-20 Year Treasury Bond ETF (NYSEArca: TLH) has a 9.72 year duration and a 1.89% 30-day SEC yield, and the iShares 10+ Year Credit Bond ETF (NYSEArca: CLY) has a 13.16 year duration and a 3.97% 30-day SEC yield.
TLH only tracks high-quality, AAA-rated U.S. Treasuries while CLY holds a slightly lower quality tilt, including AAA 2.6%, AA 9.9%, A 37.3% and BBB 49.4%.
PowerShares Build America Bond Portfolio
For more information on the munis market, visit our municipal bonds category.
Max Chen contributed to this article.