Time to invest in munis?

Municipal bonds look especially attractive now, and for a variety of reasons.

For starters, they are yielding far more than usual in relation to their customary rivals, Treasuries—which don’t even have the advantage of being tax- exempt. Typically munis yield only 75 percent to 90 percent of what Treasuries do. Now long-term Treasuries are yielding about 4.3 percent (because the demand for such super-safe investments has climbed), whereas high-quality munis are paying a lofty 5.5 percent. And that’s before taxes. If someone is in the 35 percent bracket, munis are yielding almost 9 percent. In the 25 percent tax bracket, it’s 7.3 percent. “It’s an incredible value,” says Warren Gisser, a senior vice president of JB Hanauer in Parsippany, N.J., a fixed-income brokerage with branch offices in Philadelphia and Florida.

Besides which, taxes appear likely to go up, especially for the well-to-do—to pay for the bail-out, the ongoing wars, and our deteriorating roads, bridges, and sewer systems.

Possible objections: Aren’t institutions still unloading their munis? Yes, says Gisser, but the panicky selling seems to be slowing down. What about inflation, the bane of fixed-income investments in general? Eventually the bail-out may stimulate inflation, Gisser grants, but over the short run, hardly anyone expects prices to climb.

Gisser recommends general-obligation bonds, especially those from states and large cities, and revenue bonds for “essential services” (water, sewer, and highway). And he prefers individual munis over mutual funds—one reason being that you have a maturity date when you get your money back, which is not usually the case with fixed-income mutual funds. – Warren Boroson

Guest contributor Warren Boroson is the author of more than 20 books, including “How to Pick Stocks Like Warren Buffett” (J.K. Lasser).

Comments

[Red]

How does one go about buying Muni bonds?

[Greg Daugherty, Consumer Reports]

Thanks, Red, for your question. You can buy individual municipal bonds through most brokerage firms or buy shares in a municipal bond mutual fund from a no-load (meaning there's no upfront sales charge) fund family like Vanguard. Hope that helps.

[bex]

aren't individual munis a lot more risky than a mutual fund?

There have been several news stories about cities investing their money poorly, and nearly going bankrupt... so I guess you have to pick your individual munis wisely.