For many investors, the new tax law makes investing in municipal bonds “more sensible than ever,” according to a recent article in Barron’s.
“The norm for muni-bond yields these days—about 2.5%–could be like getting 5% on a taxable corporate bond,” the article reports. “The tax savings is that big.”
The article explains how to calculate a taxable-equivalent yield–divide the stated yield by one minus the tax rate—and illustrates by using an example of a married couple with $250,000 in annual income. Under the new tax code, it says, deductions for state and local taxes (SALT) is capped at $10,000, important in states with higher taxes (such as New York, New Jersey and California).
One caveat, the article points out, is that municipals haven’t performed well this year as interest rates have risen. High-yield munis, it says, have done better. “Compared with investment-grade credits, high-yield bonds are much more of a play on credit risk. However, with the U.S. economy in pretty good shape and tax receipts healthy, high-yield munis for the most part haven’t caused a lot of worry among investors.”
For more trends in fixed income, visit the Fixed Income Channel.