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Fund Spy

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 shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.