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Looking for Yield? Look at Munis

Munis' yields are looking increasingly attractive.

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It's no secret many bond investors took it on the chin this summer. Concern over defaults in subprime mortgage-backed securities, initially contained to that corner of the fixed-income arena, eventually burst into the rest of the bond market, as market liquidity dried up and bond yields spiked. We've received a lot of questions from the press and subscribers about what areas of the bond market look attractive now, and we keep coming up with the same answer: munis.

Comparing Apples to Apples, Sort of
Munis don't make for the easiest of comparisons. But one factor we can accurately assess is their credit risk versus other fixed-income asset classes. For example, the default risk of U.S. Treasuries is virtually nil, so they're less risky than munis. But high-quality munis are a safer bet than corporate bonds. So to start our comparison, we put the highest-quality municipal issues side-by-side with Treasuries. And because only a small percentage of investors and managers buy only Treasuries without diversifying into other government-backed paper and U.S. corporate bonds, we also looked at AAA munis' attractiveness versus a handful of well-known, AAA rated corporate issuers.

The 10-year Treasury yields 4.59 %, while the AAA muni yields just 3.85%. However, on a tax-equivalent basis, the muni's yield jumps to 5.35% for those investors in the 28% tax bracket. And for those in the 35% bracket, the yield jumps to 5.92%. And that compares favorably with AAA bonds from both General Electric and Citigroup, which yield 5.61% and 5.75% respectively. (Try out our muni tax calculator to find out more).

Andrew Gunter does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.