Longer term municipal bonds with maturities of around 15 years to 25 years looked very attractive at the beginning of the year as they yielded the same or more than comparable taxable bonds. That's rare.
Normally tax-free bonds yield less than comparable taxable bonds in nominal terms, since after tax municipal bonds look even more attractive.
In early January the absolute spreads between AAA general obligation municipal bonds and treasuries were between 0.60 percent and 0.70 percent. This means for roughly the same credit risk (very little) and the same maturity investors were paid more to buy tax-free bonds than taxable bonds.
The 30 year Treasury bond yielded about 3.9 percent, while the comparable tax free municipal yielded around 4.5 percent. After tax this yield advantage widened.
If you assume a 25 percent tax bracket for an investor, the tax equivalent yield of the municipal bond becomes approximately 5.6 percent. The 5.6 percent vs. 3.9 percent tax equivalent spread represented an historically wide yield advantage in holding municipal bonds.
Related Link: 4 Advantages Of Chinese Investment Grade Bonds
Long Versus Short Maturities
But does this advantage still exist, and now that interest rates have come down is it still worth taking the risk to go out that far on the curve?
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