After yields dipped lower this year, fixed-income investors may find better yield opportunities in municipal bonds and related exchange traded funds.
The benchmark 10-year Treasury yield is hovering around 1.8% after touching its lowest since May 2013 in January. Meanwhile, investment-grade 10-year municipal bond yields an equivalent 3.5% for investors in the 28% federal tax bracket, and those in higher income brackets are looking at taxable equivalent yields of 3.7% to 4.7%, Bloomberg reports.
To put this in perspective for ETF investors, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.71 year duration, shows a 1.6% 30-day SEC yield.
In contrast, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) has 6.37 year duration and a 1.4% 30-day SEC yield, or 2.47% taxable equivalent yield for those in the highest income bracket. The SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) has a 7.07 year duration and a 1.83% 30-day SEC yield, or 3.04% for those in the highest income bracket. Additionally, the Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) has 7.4 year duration and a 1.71% 30-day SEC yield, or a 3.02% taxable equivalent yield. [Muni ETFs May Be More Attractive Than Treasuries]
Marilyn Cohen, chief executive officer of Envision Capital Management, also argues that muni investors should target the intermediate duration. The 7- to 12-year range provides solid yields without the price volatility associated with long-term issues if rates begin to rise. [Diversify with a Cheap, Broad Munis Bond ETF]
Municipal bonds generate relatively higher yields than Treasuries due to their tax benefits. Specifically, municipal bonds enjoy federal tax breaks. Munis issued from the state an investor is living in are also shielded from local income tax. Additionally, for those who pay the 3.8% federal net investment income tax that’s part of the Affordable Care Act, munis are exempt from the health-care surtax.