While many investors are mesmerized by the confounding and dramatic swings of the stock market, the real action – yield-wise – is in a decidedly less glamorous corner of the securities market: Municipal bonds.
Consider the alternatives.
The S&P 500 dividend yield is just under 2.00%; AA-rated corporate bonds yield about 1.50%.
The yield on 10-year Treasuries is below 1% and five-year CDs are lower still. Anyone considering stashing cash in a money-market fund would barely eke out any yield. And these paltry returns are then subject to taxation.
Yet high quality municipal bonds currently yield about 3.00% tax-free. And for investors in the highest tax brackets, the taxable equivalent yields can be nearly double.
For securities traditionally known for their lack of pizzazz, these muni yields are turning heads.
Value in muni yields
Longtime muni investors know how to spot value in the market.
First, they don’t dream of the market returning to yesterday’s yields. They know they can’t predict how and when interest rates will change and don’t even try. Instead, they focus on maximizing their yield now. After all, did anyone accurately predict the decline of interest rates over the past 40 years?
Second, they take advantage of periodic anomalies, as they did earlier this year when panic roiled the markets and investors sold indiscriminately (“When Panic Hit, Savvy Muni Investors Pounced”).
Now, as muni investors navigate further through the pandemic’s economic fallout, value is easy to find. Plus, their confidence is bolstered by some encouraging signs.
For example, S&P Global Ratings recently affirmed Build America Mutual’s AA rating and stable outlook, “the strongest rating S&P assigns to any active bond insurer.”
BAM covers more than $75 billion of municipal securities and is the country’s second largest muni insurer.
The firm mostly insures general obligation bonds for schools and cities, “which somewhat lessens the volatility of its insured portfolio,” S&P said.
In response to COVID-19, S&P performed a stress test on BAM’s portfolio and concluded its portfolio “may perform better in a stressful economic scenario.”
Meantime, the nation’s top insurer, Assured Guaranty, continues to write new business in both the new issue and secondary markets (“Finding Muni Bonds that Make Sense”). The company said it’s positioned “well to manage any negative impact” from the pandemic.
Of course, the health of insurers isn’t the last word on the state of the market. Investors still must do their research to find quality bonds that suit their objectives – and they’re readily available.
Attractive muni yields allow fixed-income investors to sleep well at night and keep their interest clock ticking.