Municipal Bonds For High Yield Tax Free Income
Municipal Bonds provide investors with a great combination of high yields and tax-free income. With the broader acceptance and availability of access to munis, their appeal and grown tremendously in recent years. There are risks, of course, but there are ways to diversify that risk and enjoy the dual benefit of net returns and paying no taxes, which is especially attractive in light of anticipated tax increases.
How Municipal Bonds work
Muni bonds often trade at a premium to US Treasuries which are considered risk-free by a small margin, plus the amount of tax savings for the highest tax bracket. This makes sense, since often times, high net worth individuals seek the safety and yield of munis, and the market infers a slight spread above Treasuries since a municipality is more likely to default on a loan than the US government, which can always just print more money under the US Fiat currency model. In recent years, with the financial collapse and lack of liquidity in the system, many muni bond investments sold off, opening up great opportunities for investors. Some bargains still exist.
With the current uncertainty over long-term tax rates as well, investors are keen on owning municipal bonds that will provide a tax-shelter for those higher tiers as well.
Muni Bond Risks
To be clear, there are some municipalities in the US that are facing potential default on their obligations. However, this is somewhat mitigated by the lack of political will to allow this to occur. For instance, during the recent stimulus bill, Billions of dollars in federal tax dollars were diverted to states to cover budget shortfalls, which had the indirect effect of preventing municipalities from declaring bankruptcy. How long this can continue and which municipalities would be at risk is as much of a financial calculation as it is a political calculation. As such, it's a good idea to own a diversified pool of muni bonds as opposed to an individual issue.
Various Ways to Invest in Muni Bonds
One does not have to necessarily go out and buy an individual bond from a local municipality. With the advent of securitization and financial innovations, investors can now invest in muni bonds and other high yield investments through the following means:
Muni Bond Funds
High Yield Bond ETFs
High Yield ETFs (various asset classes)
MLPs (Master Limited Partnerships)
Return from Municipal Bonds to All High Yield Passive Income